The Federal Reserve System Balance Sheet:
What has Happened and Why it Matters
Peter Stella
Advisor
Monetary and Capital Markets Department
International Monetary Fund
Swiss National Bank, Zurich, September 30, 2009
The views in this presentation are the author’s and do not represent those of
the IMF, its Management or Executive Board
Table 4. FRB Consolidated Balance Sheet end-2006
(In billions of dollars)
Assets
Government Securities
Liabilities
784 FR Banknotes
783
Liquidity providing repos
41 Reverse repos w/ foreign entities
30
Foreign Exchange
21 Bank deposits
19
Gold
11 Government deposits
Other assets (net)
11
Total
868
5
Capital and reserves
31
Total
868
Source: FRB Annual Report 2006 and author’s calculations.
Figure 1: Consolidated FRB Total Assets: ratio to GDP
18
16
14
12
10
8
6
4
2
0
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2007
2008
Figure 2: US Federal Reserve Banks: Total Assets and Banknotes
(in US$ billions)
2500
2000
1500
Total Assets
Banknotes
1000
500
0
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2007
2008
Figure 3: US FRB Policy Assets in percent of GDP
14
12
10
8
6
4
2
0
1996
2001
2002
2003
2004
2005
2006
2007
2008
Figure 4: US Commercial Bank deposits at the FR in percent of GDP
7
6
5
4
3
2
1
0
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2007
2008
Largest US Commercial Banks end-2001
Rank
1
2
3
4
5
Name
Bank of America
JP Morgan Chase
Citibank
First Union/Wachovia
Fleet Bank
Federal Reserve Banks
Consolidated Assets
(in $billions)
552
538
452
233
188
Cumulative Market
Share
9
18
25
29
32
51
Absolute share 1 %
Source: Federal Reserve Board release Large Commercial Banks; and author’s calculations. FRB “absolute share”
is FRB assets divided by total bank assets.
Largest US Commercial Banks end-December 2008
Rank
1
2
3
4
5
6
Name
JP Morgan Chase
Bank of America
Citibank
Wachovia (since merged)
Wells Fargo (since merged)
U.S. Bank NA
Federal Reserve Banks
Consolidated Assets
(in $billions)
1746
1472
1227
635
539
262
1690
Cumulative Market
Share
15
28
39
44
49
51
Absolute Share 15%
Sources: Federal Reserve Board release Large Commercial Banks; and author’s calculations. 2008 FRB data is
from the Annual Report and shows FRB “absolute share” as calculated in Tables 3 and 4.
Figure 13
Figure 12: US Consolidated FRB: Share of Treasuries and Agencies in Total Assets
100
90
80
70
60
50
40
30
20
10
0
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2007
2008
Dates
10/28/2009
10/14/2009
9/30/2009
9/16/2009
9/2/2009
8/19/2009
8/5/2009
7/22/2009
7/8/2009
6/24/2009
6/10/2009
5/27/2009
5/13/2009
4/29/2009
4/15/2009
4/1/2009
3/18/2009
3/4/2009
2/18/2009
2/4/2009
1/21/2009
1/7/2009
12/24/2008
12/10/2008
11/26/2008
11/12/2008
10/29/2008
10/15/2008
10/1/2008
9/17/2008
Billions of US dollars
Figure 14: US Treasury SFP: Amounts Outstanding Actual and Projected as of September 16, 2009
600
500
400
300
200
100
0
US Federal Reserve Swaps with other Central Banks
(in billions of US Dollars)
Institution
Bank of Canada *
Banco de México *
European Central Bank
Swiss National Bank
Bank of Japan
Bank of Canada
Bank of England
Danmarks Nationalbank
Reserve Bank of Australia
Sveriges Riksbank
Norges Bank
Reserve Bank of New Zealand
Bank of Korea
Banco Central do Brasil
Banco de México
Monetary Authority of Singapore
Total
Amount of Facility
Outstanding as of
December 31, 2008
2
3
Unlimited
Unlimited
Unlimited
30
Unlimited
15
30
30
15
15
30
30
30
30
Unlimited
0
0
291.4
25.2
122.7
0
33.1
15
22.8
25
8.2
0
10.4
0
0
0
553.7
Source: Treasury and Federal Reserve Foreign Exchange Operations (October - December 2008)
* All swaps other than these are temporary.
Table 4. FRB Consolidated Balance Sheet end-2006
(In billions of dollars)
Assets
Government Securities
Liabilities
784 FR Banknotes
783
Liquidity providing repos
41 Reverse repos w/ foreign entities
30
Foreign Exchange
21 Bank deposits
19
Gold
11 Government deposits
Other assets (net)
11
Total
868
5
Capital and reserves
31
Total
868
Source: FRB Annual Report 2006 and author’s calculations.
Table 5. FRB Consolidated Balance Sheet end-2008
(In billions of dollars)
Assets
Government Securities
Liabilities
496 FR Banknotes
Foreign Exchange Swaps
554 Reverse repos w/foreign entities
Term Auction Credit
450 Bank deposits
Commercial paper funding facility
334
Other loans
194
Liquidity providing repos
80 Government deposits
Maiden Lane LLC holdings
74
Foreign Exchange
Gold
Total
853
88
860
365
Other Liabilities (net)
51
Capital and Reserves
42
66
11
2259
Source: FRB H.4.1 and author’s calculations.
Total
2259
Figure 15 US Federal Reserve Bank Risk Assets to Capital Ratios
50
45
40
35
30
25
20
15
10
5
0
Consoldiated FRB Average
Summary of Static Risk Assumptions
(in percent)
Table 8. Summary of Static Risk Assumptions
(in percent)
Asset
Default
LGD
TAF/Primary
20
12
CPFF/AMLF
10
15
AIG Loan
75
50
Maiden Lane
75
80
TALF
30
35
Source: Author’s assumptions
US FRB: Risk and Loss Assumptions
(projected end-2009 balance sheet as of May 2009)
Table 9. Summary of FRB Loss Scenario Envelope
(US$ billion)
Exposure
“Loss”
TAF/Primary
577
14
CPFF/AMLF
358
5
AIG Loan
39
15
Maiden Lane
74
44
TALF (proj)
1000
105
Total
2048
183
Asset
Source: Author’s assumptions
US Federal Reserve System Capacity to Absorb Losses
Nature of the reserve
Current capital and reserves
Annual profit
Banknote issuance
Subtotal
Revaluation of gold
Mark to Market SOMA
(Treasury/Agencies)
Present Value in
U.S.$ billion
42.2
30.7
27.8
100.7
235.6
64.2
Notes
End-December 2008
Average 2004-2008
Average 2004-2008
Gold at 943.25 per ounce*
End-December 2008
Source: Federal Reserve Board Annual Reports (various); author’s calculations. London mid-morning
fixing price March 4, 2009.
Figure 17: FRB Profit in scenario 1
(US$ billions)
100
50
0
2008
-50
-100
-150
-200
-250
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Figure 18: FRB capital in scenario 1
(percent of GDP)
1.5%
1.0%
0.5%
-0.5%
-1.0%
-1.5%
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0.0%
Figure 19: FRB Profit in scenario 2
(US$ billions)
100
50
0
2008
-50
-100
-150
-200
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Figure 20: FRB capital in scenario 2
(percent of GDP)
2.5%
2.0%
1.5%
1.0%
0.5%
-0.5%
-1.0%
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0.0%
Figure 21: FRB Profit in scenario 3
(US$ billions)
100
80
60
40
20
0
2008
-20
-40
-60
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Figure 22: FRB capital in scenario 3
(percent of GDP)
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0.0%
US Federal Reserve: Risk and Loss Assumptions projected
(September 9 2009 )
Table A2 Summary of FRB Loss Scenario Envelope
(US$ billion)
Asset
Exposure
“Loss”
TAF /Primary
232
6
CPFF /AMLF
46
1
AIG Loan
39
15
Maiden Lane
61
37
TALF
37
4
Total
415
63
Source: Author’s assumptions
Federal Reserve System: Financial or
Governance Risk?
It is quite improbable that the FRB would encounter financial problems
necessitating a change in monetary policy
However, there are considerable political pressures to restrict the Fed’s
operational independence given the sharply contrasting governance
arrangements for the US Treasury and FRB although, in reality, they are
provided with similar powers
In order to prevent a loss of monetary policy independence, it may be
advisable to isolate those strictly monetary authority functions and place
them under a more streamlined governance structure (FOMC?)
The FRB “emergency” powers, under section 13.3 might then be placed in a
more directly politically accountable governance structure—with US
Treasury and Regulator representation.
Federal Reserve System Balance Sheet
Risk Management and the Exit Strategy
Website publication of SPV balance sheets and consolidation with FRB
accounts accompanied by descriptions of unconventional measures
marks significant progress in transparency
Reconfigure FRB balance sheet to reduce risk and build capital
Dispose of SPVs, enhance reserves, move toward dividend
distribution after publication of audited accounts
Separate monetary policy with all elements under FOMC or reformed structure
Small operations with minimal credit risk
Financial market stability entity with intervention capacity
Scaleable balance sheet w/o capacity to create money
Design governance structure and determine how SMC would fit within the new
regulatory and supervisory framework