Financial highlights



  • Foreign currency intervention capacity $10.3 billion at year end.

  • An appreciating NZD reduced the surplus for the year to $52 million, following the large surplus in the previous year that arose from a depreciating NZD.

  • A dividend of $140 million will be paid to the Government in September 2016.

  • The Bank remains well capitalised, with equity of $2.8 billion.

  • Net operating expenses for 2016 were $9.9 million less than in the funding agreement. This underspend is expected to reverse in the remaining years of the funding agreement.

Table 7

Key indicators





Foreign currency intervention capacity



Currency in circulation






Surplus for the year



Net operating expenses



Dividend payment to the Government



Chart 7: Foreign currency assets and foreign currency intervention capacity


Chart 8: Surplus for the year


Financial highlights



  • NZD financial liabilities at 30 June were $20.4 billion.

  • Foreign currency swaps were $16.7 billion.

  • Open foreign currency position $3.0 billion, down $0.5 billion from 2015.

  • Foreign currency assets were $22.2 billion.

  • Currency in circulation increased 7.2 percent to $5.6 billion.

Liabilities and equity

The Bank is funded by deposits from banks, deposits and loans from the Government, Reserve Bank bills issued, notes and coins issued to the public, and the Bank’s equity.

Deposits from banks averaged $8 billion in 2016 and are maintained at a level that ensures there is sufficient liquidity in the banking system to facilitate daily interbank payments and ensure that short-term interest rates align closely with the OCR.

Deposits from banks and the Government vary from day to day and result in fluctuating levels of funds available for investment.

Most of the Bank’s funding is denominated in NZD.

The Bank issues currency through banks as required to meet demand from the public. Currency in circulation increased by 7.2 percent in 2016, continuing the trend of yearly increases.

The proceeds received from the issuance of currency are invested by the Bank, producing investment revenue known as seigniorage. Seigniorage in 2016 was $179 million, down from $214 million in 2015 because of lower short-term interest rates, partly offset by an increase in currency in circulation.

Chart 9: Composition of liabilities and equity as at 30 June 2016 ($billion)

$7.3Deposits from banks$0.8Derivative liabilities$7.6Deposits and loansfrom Government$0.7Reserve Bank bills$5.6Currency incirculation$1.2Other liabilities$2.8Equity

Assets and investment

The Bank invests most of the proceeds of its funding into foreign currency assets.

Investments mainly comprise government and near-government securities, which are both very liquid and of high credit quality, allocated across six major currencies.

The Bank also holds a portfolio of New Zealand Government bonds, and owns its Wellington office building.

Readily liquefiable foreign currency assets, less foreign currency liabilities that fall due in the next 12 months, form the Bank’s foreign currency intervention capacity. This is maintained should the Bank need to support the country’s foreign currency market in a crisis.

Chart 10: Composition of assets as at 30 June 2016 ($billion)

$2.3Securities purchasedunder agreements toresell$5.6Commercial paperagencies &supranationals$1.5Government bills$3.1Government bonds -overseas$3.4Government bonds -NZ$1.8Other assets$8.3Cash

Managing the foreign currency position

Most of the Bank’s NZD funding is converted into foreign currencies using financial derivatives contracts, such as foreign currency swaps, before being invested in foreign currency assets. As at 30 June 2016 there were $16.7 billion of outstanding foreign currency swap commitments. These reduce the Bank’s foreign currency exposure, and provide the Bank with a rate of return based on New Zealand, rather than foreign, interest rates.

Some of the NZD funding is invested directly into foreign currency assets, creating an open foreign currency position. The open foreign currency position enables the Bank to respond more effectively in the event of a crisis, and to smooth extreme exchange movements.

The open foreign currency position at 30 June 2016 was $3.0 billion, a reduction of $0.5 billion from 2015 due to a combination of foreign currency sales and appreciation of the NZD.

The open foreign currency position gives rise to revaluation gains and losses as foreign exchange rates change, resulting in volatility of reported profits.

Chart 11: Net open foreign currency position


Risk management

The Bank has a comprehensive approach to managing risk. Strong and effective financial and operational risk management disciplines are in place, and operate within an enterprise risk management framework that spans all functions in the Bank.

The Bank’s foreign reserves management and domestic markets operations face a number of types of financial risk, including credit risk, liquidity risk and market risk.

To manage credit risk and liquidity risk, the Bank sets limits on the types of investments it holds, the counterparties with which it trades and the duration of the investments it makes. These limits seek to maintain the highest credit quality and liquidity of investments.

The Bank also takes and gives collateral as security to minimise the credit risk associated with the market value of financial derivatives contracts.

The principal market risks the Bank manages are foreign currency risk and interest rate risk.

Unhedged foreign currency positions, which arise as part of the Bank’s activities to support monetary policy and to maintain orderly markets, operate in accordance with the RBNZ Act and under a Memorandum of Understanding with the Minister of Finance.

The Bank’s actively managed portfolios operate within limits that manage exposure to gains and losses arising from changes to foreign exchange and interest rates.

Foreign reserves assets are aligned with the Bank’s liability structure, and managed in two pools, hedged reserves and unhedged reserves.

Chart 12: Standard & Poor's credit rating of financial assets as at 30 June 2016 ($26 billion)

19%AAA51%AA+/-15%A+/-15%Other/not rated

Financial highlights



  • Capital requirement unchanged at $2.3 billion.

  • Equity at 30 June 2016 $2.8 billion.

  • A dividend of $140 million will be paid to the Government in September 2016.

Capital management

The Bank assesses the amount of capital required to cover the financial risks inherent in undertaking its functions, using a range of potential risk scenarios, at $2.3 billion, unchanged from 2015. This assessment is a guideline for the Bank’s capital requirement, including the level of equity the Bank will seek to retain after the impact of the surplus for the year, revaluations and dividend payments. In accordance with the dividend principles the Bank generally does not distribute unrealised gains, and equity may exceed the capital requirement guideline.


The Bank’s equity at 30 June 2016 was $2.8 billion, which included unrealised profits not eligible for distribution as dividends. The change in equity during the year was:

Table 8

Changes in equity



Surplus for the year


Movements in reserves (see note)


Total comprehensive revenue for the year 


Dividend payable


Change in equity for the year


Equity at 1 July 2015


Equity at 30 June 2016


NOTE: Includes gains and losses relating to revaluations of certain assets recorded directly in equity rather than being included in the surplus for the year. These assets include the Bank’s holdings of New Zealand Government bonds and its investment in the Bank for International Settlements, which are designated as ‘Available for Sale’, and the Bank’s Wellington building.


Surplus equity is paid to the Government as a dividend. The Bank provided for a dividend of $140 million in the financial statements and will pay this in September 2016.

The 2016 dividend is lower than the $510 million dividend paid in 2015. The 2015 dividend was unusually high due to the large surplus, that allowed realised gains from 2014 to be distributed in 2015. In 2014 these gains were retained to bolster equity and offset unrealised foreign exchange revaluation losses.

Chart 13: Dividend payment to Government


Financial highlights



  • The surplus for the year to 30 June 2016 was $52 million, a reduction of $572 million from 2015.

  • Net interest revenue was slightly less in 2016 than 2015 due to lower interest rates.

  • A higher NZD at year end resulted in a $201 million loss from foreign exchange rate changes on the Bank’s open foreign currency position in 2016, compared with a $379 million gain in 2015.


The Bank’s surplus or deficit for the year is largely an outcome of decisions made in undertaking its policy functions in financial markets. The primary focus is on carrying out these activities in the most efficient manner rather than on maximising profit in all circumstances, and volatility in the surplus is expected when there is volatility in foreign exchange rates and interest rates.

The main components of net investment revenue are net interest revenue, gains and losses from fair value changes in financial instruments, and gains and losses from foreign exchange rate changes. In 2016:

  • net interest revenue reduced by $1 million. There were lower interest rates in 2016, which reduced seigniorage revenue earned on currency in circulation, offset by lower funding costs on the open foreign currency position and foreign reserves;

  • gains from changes in the fair value of financial instruments were $9 million more than in 2015; and

  • the TWI appreciated by 6.6 percent, resulting in a $201 million loss from foreign exchange rate changes on the open foreign currency position, a $580 million decrease from 2015.

Table 9







Net interest revenue



Gains (losses) from changes in fair value of financial instruments



Gains (losses) from changes in foreign exchange rates



Dividend revenue



Net investment revenue



Other operating revenue



Total operating revenue



Total operating expenses



Surplus for the year



Chart 14: Net investment revenue


Chart 14 key

The significant volatility experienced in recent years in foreign exchange rates and the fair value of financial instruments has resulted in volatile net investment revenue over time.

Financial highlights




  • Total operating expenses in 2016 were $71.2 million.

  • The Bank is undertaking a significant multi-year programme of systems improvements and expenses on two projects are being capitalised, reducing operating expenses in 2016. These costs will be amortised to operating expenses in future years once projects are completed.

  • Net operating expenses in 2016 were $9.9 million less than in the funding agreement.

Operating expenses

Total operating expenses in 2016 were $71.2 million, similar to 2015. The main differences from 2015 were:

  • currency issue expenses include the costs of introducing the new Series 7 Brighter Money banknotes and a $1.6 million provision for the write-off of obsolete banknotes (2015 $6.7 million);

  • reduced staff expenses arising from lower staff numbers. In 2015 $1.0 million was provided for restructuring costs;

  • the capitalisation of expenses relating to projects to improve payment systems and treasury systems; and

  • a $2.7 million loss on the actuarial valuation of the defined benefit superannuation scheme. In 2015 there was a $2.8 million gain.

Table 10

Operating expenses





Staff expenses



Net currency-issued expenses



Asset management expenses



Other operating expenses



Operating expenses



Actuarial loss (gain) on defined benefit superannuation scheme



Total operating expenses



Funding Agreement

The funding agreement between the Bank and the Government sets out the expectations of the operating expenses, and certain items of income, within which the Bank is expected to manage its operations.

The current funding agreement covers the five-year period ending 30 June 2020.

Net operating expenses were $9.9 million below the funding agreement in 2016 because: revenue from NZClear was at record levels as a result of high equity settlement transaction volumes; expected advisory services associated with the planned divestment of NZClear were not required when divestment did not occur; core operating expenses were below budget for the reasons already outlined; and direct net currency issue expenses were below budget due to the timing of the new currency issuance.

Table 11

Net operating expenses and the funding agreement



Funding agreement


Core operating expenses


Income from operations


Net core operating expenses



Direct net currency-issued expenses



Net operating expenses



Under-expenditure compared with the funding agreement*


*2016 and cumulative

This under-expenditure is expected to reverse during the remainder of the funding agreement as capitalised expenditure on system improvements is amortised to operating expenses and the Series 7 Brighter Money banknote issuance accelerates. Aggregate net operating expenses in the five years of the funding agreement will be managed within the cumulative amount allowed for in the funding agreement.