Reserve Bank of Australia Annual Report 2011

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Credit Risk Credit risk is the potential for financial loss arising from an issuer or counterparty defaulting on its obligations to: repay the principal; make interest payments due on an asset; or settle a transaction. For the RBA, credit risk arises from exposure to: the issuers of securities that it holds; banks with which it deposits funds; and counterparties which are yet to settle transactions. The RBA’s credit exposure is low compared with that of most commercial financial institutions, as it manages such risks within a highly risk-averse framework. In particular, credit risk is managed by: holding securities issued by a limited number of highly rated governments, government-guaranteed agencies and supranational organisations; holding government-guaranteed issues of certain commercial banks; and holding collateral only of low credit risk against buy repurchase agreements and gold loans. Cash invested under repurchase agreements in overseas markets is secured by collateral in the form of government securities or securities issued by US agencies; the RBA takes and maintains collateral to the value of 102 per cent of the cash invested. Cash invested under domestic buy repurchase agreements is secured by securities issued by Australian governments, Australian banks and various corporate and asset-backed securities (see Note 1(b)). The RBA holds collateral to a value of between 102 and 110 per cent of the amount invested according to the risk profile of the collateral held. If the current value of collateral offered by a counterparty to a repo transaction falls by more than a pre-determined amount, the counterparty is required to provide additional collateral to restore this margin; the thresholds are specified in the legal agreements which govern these transactions. Gold loans are secured by Australian dollar securities to 110 per cent of the market value of the gold loaned. The RBA does not sell or re-pledge securities held as collateral under buy repurchase agreements. The RBA’s maximum exposure to credit risk in relation to each class of recognised financial assets, other than derivatives (off-balance sheet items), is the carrying amount of those assets as indicated in the balance sheet. The RBA’s maximum credit risk exposure in relation to off-balance sheet items is: 1. Foreign exchange swaps – As at 30 June 2011, the RBA was under contract to purchase $0.2 billion of foreign currency ($4.9 billion at 30 June 2010) and sell $0.3 billion of foreign currency ($1.9 billion at 30 June 2010). As of that date there was a net unrealised gain of $4 million on these swap positions included in net profit ($26 million unrealised gain at 30 June 2010). The exposure of these contracts to credit risk is the cost of re-establishing the contract in the market if a counterparty fails to fulfill its obligations. 2. Interest rate futures – As at 30 June 2011, the amount of credit risk on interest rate futures contracts was approximately $1.4 million ($1.4 million at 30 June 2010). As at 30 June 2011 there was an unrealised loss brought to account on those contracts of $0.6 million ($0.5 million unrealised loss at 30 June 2010). Concentration of credit risk As noted, the RBA operates to minimise its credit risk exposure through comprehensive risk management policy guidelines. The following table indicates the concentration of credit risk in the RBA’s investment portfolio. The RBA held no past due or impaired assets at 30 June 2011 or 30 June 2010. 100 Reserve bank of Australia
Australian Dollar Securities risk rating of security/issuer 1 Risk rating of counterparties 1 % of total assets 2011 2010 Holdings – Commonwealth Government securities AAA n/a 0.6 0.9 Holdings – Semi Government securities Securities sold under repurchase agreements Securities held under repurchase agreements Foreign Investments Holdings of securities Securities sold under repurchase agreements Securities held under repurchase agreements Deposits AAA AA AAA AAA AA AAA AAA AAA AAA AA AA AA AA A A A Other 2 AAA AA A AAA AAA AA AAA AAA AAA AA AA n/a n/a n/a n/a AA A AA AA A BBB Other 3 AA A BBB Other 3 AA A BBB AA n/a n/a n/a AA A A AAA AA A AA A AAA AA 4.3 5.9 0.2 0.2 0.1 11.9 7.4 0.1 0.3 6.1 2.6 – 0.1 1.8 0.5 0.1 – 29.9 1.5 0.5 0.9 0.8 – 0.4 8.3 5.5 – 0.5 1.7 – 3.8 1.0 0.1 0.2 – 9.8 10.0 1.2 0.8 9.7 2.0 0.1 0.1 2.3 0.1 – 0.9 Gold Loans n/a AAA 0.1 0.2 Other 7.7 6.4 100 100 29.2 4.7 0.5 3.6 0.9 0.1 – 6.8 2.8 0.1 0.1 0.4 1.2 1 Standard & Poor’s equivalent ratings. 2 This category includes Asset Backed Commercial Paper (ABCP), which does not have a long-term credit rating. 3 This category includes counterparties which are not rated. Annual report 2011 | notes to the financial statements 101
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RESERVE BANK OF AUSTRALIA ANNUAL RE
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© Reserve Bank of Australia 2011.
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The banking and payments group cont
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4 Reserve bank of Australia
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Audit Committee The objectives of t
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Roger Corbett AO Member since 2 Dec
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Committee’s questioning of the Ba
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The Reserve Bank hosts regular conf
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Reserve Bank Balance Sheet $ billio
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Days 120 100 80 60 40 20 0 Australi
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sovereign debt crisis in Europe and
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M 250 200 150 100 50 by other users
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about 10 per cent less than in 2007
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% Value of Banknotes on Issue Per c
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ppm 20 15 10 5 0 04/05 Source: RBA
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countries), the main international
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appropriate fee; the committed amou
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Economic activity in most EMEAP eco
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Staff in the State Offices also pla
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The Reserve Bank continued to provi
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Page 54 and 55: No 50 40 30 20 10 counterfeit exami
Page 56 and 57: expected to reduce energy and water
Page 58 and 59: 4 3 2 1 0 and Securency Internation
Page 60 and 61: 40 20 Credit Exposure Per cent of b
Page 62 and 63: lost. The centrepiece of these arra
Page 64 and 65: The Reserve Bank follows commercial
Page 66 and 67: 62 Reserve bank of Australia Underl
Page 68 and 69: The Reserve Bank is committed to th
Page 70 and 71: 66 Reserve bank of Australia
Page 74 and 75: Balance Sheet - As at 30 June 2011
Page 76 and 77: Statement of Distribution - For the
Page 78 and 79: Cash Flow Statement - For the year
Page 80 and 81: Notes to and Forming Part of the Fi
Page 82 and 83: Interest on fixed coupon securities
Page 84 and 85: Sell repurchase agreements Securiti
Page 86 and 87: Balances of asset revaluation reser
Page 88 and 89: Note 2 - Net Profits Interest reven
Page 90 and 91: Note 4 - Interest Revenue and Inter
Page 92 and 93: Note 6 - Cash and Cash Equivalents
Page 94 and 95: Note 10 - Other Liabilities Provisi
Page 96 and 97: As at 30 June 2011 and 30 June 2010
Page 98 and 99: Accounting Valuation For financial
Page 100 and 101: Note 14 - Superannuation Funds (Con
Page 102 and 103: Market Risk Market risk is the risk
Page 106 and 107: Liquidity Risk Liquidity risk is th
Page 108 and 109: Maturity Analysis - As at 30 June 2
Page 110 and 111: As at 30 June 2011 One $M Level Two
Page 112 and 113: Auditor-General for Australia Austr
Page 116 and 117: Organisational Chart August 2011 Re
Page 118 and 119: Banking and Payments Group Assistan
Page 120: Glossary ACC Asian Consultative Cou
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Reserve Bank of Australia Annual Report 2011

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