MARK KENNY October 26, 2013
Counselled against transferring money: Wayne Swan. Photo: AFR
Wayne Swan considered bolstering the Reserve Bank's reserve fund this year but was formally counselled by the Treasury that shoring up its capital holdings could be counterproductive, Fairfax Media has discovered.
In an official minute to the then treasurer, dated April 10, 2013, and marked ''Sensitive'', Mr Swan was counselled against transferring money from the government to the bank.
The minute also advised that doing so could compromise the bank's independence from the government.
The advice contradicts any suggestion by the current government that Mr Swan had been negligent in allowing the bank's capital buffer to run down and had acted against the advice of the RBA.
''There is no specific provision in the Reserve Bank Act 1959 for the Commonwealth to make a capital injection to the Reserve Bank,'' the advice from the general manager of the macroeconomic policy division says. ''There is also provision in the act that would allow the Reserve Bank board to request a capital injection from the Commonwealth.''
The advice was sought after Joe Hockey, then the shadow treasurer, raised concerns in February about the state of the Reserve Bank's reserve fund.
In April, Reserve Bank governor Glenn Stevens told the parliamentary economics committee that he would have preferred that the government had allowed the bank to retain all of its profit of just over $1 billion for the previous year rather than being required to surrender half to the Treasury.
The Coalition viewed the decision to take $500 million from the Reserve Bank as a cynical exercise in bolstering the budget to speed the return to surplus.
This week, Mr Hockey, now as Treasurer, announced a surprise allocation of capital to the Reserve Bank Reserve Fund of $8.8 billion.
He said the decision, which has instantly added $9 billion to the budget deficit because it is borrowed money, was justified as restorative action after the bank was allegedly made more vulnerable by the actions of the previous Labor government.
''It's money that should have been allocated by the Labor Party in government but they didn't,'' Mr Hockey said. ''Despite the warnings, they didn't do it and they should have done it.''
He said that since the election Mr Stevens had told him ''it would be appropriate'' that the central bank's reserve fund be increased to the equivalent of 15 per cent of the bank's assets at risk.
However, the advice from the Treasury to Mr Swan, which had been formulated in conjunction with the Reserve Bank, had advised against any action that might have sent a message about the bank's foundations.
''Institutionally, there have been no recent precedents for the Commonwealth to provide the RBA with a capital injection,'' it said. ''To do so could create the perception that the RBA's viability and capacity to conduct monetary policy was beholden to the government and risk undermining the credibility of the RBA as an operationally independent institution.''