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
The Federal Reserve System Balance Sheet: What has Happened and Why it Matters
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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 - PowerPoint PPT Presentation
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The Federal Reserve System Balance Sheet: What has Happened and Why it Matters
Peter StellaAdvisor
Monetary and Capital Markets DepartmentInternational Monetary Fund
Swiss National Bank, Zurich, September 30, 2009The 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 Liabilities
Government Securities 784 FR Banknotes 783
Liquidity providing repos 41 Reverse repos w/ foreign entities 30
Foreign Exchange 21 Bank deposits 19
Gold 11 Government deposits 5
Other assets (net) 11 Capital and reserves 31 Total 868 Total 868
Source: FRB Annual Report 2006 and author’s calculations.
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2007 20080
2
4
6
8
10
12
14
16
18
Figure 1: Consolidated FRB Total Assets: ratio to GDP
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2007 20080
500
1000
1500
2000
2500
Figure 2: US Federal Reserve Banks: Total Assets and Banknotes(in US$ billions)
Total Assets
Banknotes
1996 2001 2002 2003 2004 2005 2006 2007 20080
2
4
6
8
10
12
14
Figure 3: US FRB Policy Assets in percent of GDP
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2007 20080
1
2
3
4
5
6
7
Figure 4: US Commercial Bank deposits at the FR in percent of GDP
Largest US Commercial Banks end-2001
Rank Name Consolidated Assets (in $billions)
Cumulative Market Share
1 Bank of America 552 9 2 JP Morgan Chase 538 18 3 Citibank 452 25 4 First Union/Wachovia 233 29 5 Fleet Bank 188 32 Federal Reserve Banks 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 Name Consolidated Assets
(in $billions) Cumulative Market
Share 1 JP Morgan Chase 1746 15 2 Bank of America 1472 28 3 Citibank 1227 39 4 Wachovia (since merged) 635 44 5 Wells Fargo (since merged) 539 49 6 U.S. Bank NA 262 51 Federal Reserve Banks 1690 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
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2007 20080
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Figure 12: US Consolidated FRB: Share of Treasuries and Agencies in Total Assets
9/17
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Figure 14: US Treasury SFP: Amounts Outstanding Actual and Projected as of September 16, 2009
Dates
Bill
ions
of U
S do
llars
US Federal Reserve Swaps with other Central Banks(in billions of US Dollars)
Institution Amount of Facility Outstanding as of
December 31, 2008 Bank of Canada * 2 0 Banco de México * 3 0 European Central Bank Unlimited 291.4 Swiss National Bank Unlimited 25.2 Bank of Japan Unlimited 122.7 Bank of Canada 30 0 Bank of England Unlimited 33.1 Danmarks Nationalbank 15 15 Reserve Bank of Australia 30 22.8 Sveriges Riksbank 30 25 Norges Bank 15 8.2 Reserve Bank of New Zealand 15 0 Bank of Korea 30 10.4 Banco Central do Brasil 30 0 Banco de México 30 0 Monetary Authority of Singapore 30 0 Total Unlimited 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 Liabilities
Government Securities 784 FR Banknotes 783
Liquidity providing repos 41 Reverse repos w/ foreign entities 30
Foreign Exchange 21 Bank deposits 19
Gold 11 Government deposits 5
Other assets (net) 11 Capital and reserves 31 Total 868 Total 868
Source: FRB Annual Report 2006 and author’s calculations.
Table 5. FRB Consolidated Balance Sheet end-2008 (In billions of dollars)
Assets Liabilities
Government Securities 496 FR Banknotes 853
Foreign Exchange Swaps 554 Reverse repos w/foreign entities 88
Term Auction Credit 450 Bank deposits
860
Commercial paper funding facility 334
Other loans 194
Liquidity providing repos 80 Government deposits 365
Maiden Lane LLC holdings 74 Other Liabilities (net) 51 Foreign Exchange 66 Gold 11 Capital and Reserves 42
Total 2259 Total 2259
Source: FRB H.4.1 and author’s calculations.
Boston
New York
Phila
delphia
Clevela
nd
Richmon
d
Atlanta
Chicago
St. Louis
Minneap
olis
Kansas
CityDall
as
San Fran
cisco
0
5
10
15
20
25
30
35
40
45
50
Figure 15 US Federal Reserve Bank Risk Assets to Capital Ratios
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)
Asset 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
Source: Author’s assumptions
US Federal Reserve System Capacity to Absorb Losses
Nature of the reserve Present Value in
U.S.$ billion Notes
Current capital and reserves 42.2 End-December 2008 Annual profit 30.7 Average 2004-2008 Banknote issuance 27.8 Average 2004-2008 Subtotal 100.7 Revaluation of gold 235.6 Gold at 943.25 per ounce* Mark to Market SOMA (Treasury/Agencies)
64.2 End-December 2008
Source: Federal Reserve Board Annual Reports (various); author’s calculations. London mid-morning fixing price March 4, 2009.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-250
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0
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Figure 17: FRB Profit in scenario 1(US$ billions)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Figure 18: FRB capital in scenario 1(percent of GDP)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-200
-150
-100
-50
0
50
100
Figure 19: FRB Profit in scenario 2(US$ billions)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Figure 20: FRB capital in scenario 2(percent of GDP)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-60
-40
-20
0
20
40
60
80
100
Figure 21: FRB Profit in scenario 3(US$ billions)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Figure 22: FRB capital in scenario 3(percent of GDP)
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 structureSmall 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
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