The Fed’s Balance Sheet

Introduction

A balance sheet is an accounting document showing all the assets and liabilities owned by an entity. It is extremely useful for showing how an entity is doing financially at a particular point in time. It is normally part of the regular financial reporting of a business or institution. The Fed’s balance sheet is an important document to watch because it gives a high-level summary of the Fed’s operations on a weekly basis. It is published as FEDERAL RESERVE statistical release H.4.1, each Thursday, generally at 4:30 p.m. Publication may be shifted to the next business day when the regular publication date falls on a federal holiday.

In this post, we will explain how to find both current and past data. We will analyze the content of a sample balance sheet and we will provide links to other posts which track items of interest in the balance sheet on a weekly basis. Currently there is much discussion in the media and among analysts and pundits on central bank activities, balance sheets, money printing, asset purchases and related items. A lot of it is poorly informed or misinformed. It is our intention to give you, dear reader, accurate and informed information on what the US Federal Reserve (Fed) is doing, explained in simple but comprehensive terms.

Source of the Data

Release H.4.1, titled Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks, may be found in an archive that contains all releases from June 27, 1996, to the current one. Near the top of the page is a link to a screen reader that presents a more accessible form of the current release. Also available are links to data download tools that readers that want to be able to play with the data will appreciate. The screen reader  is what we will be working from.

The Fed has a good description of its balance sheet and the tables that comprise release H.4.1 available as Credit and Liquidity Programs and the Balance Sheet. With the description of each table are links into the screen reader mentioned above. It is also published monthly by the Board of Governors of the Federal Reserve System in the Monthly Report on Credit and Liquidity Programs and the Balance Sheet.

For the balance sheet, Table 8Consolidated Statement of Condition of All Federal Reserve Banks Millions of dollars presents the data in the format we want. We will briefly discuss some of the other tables, later in this post.

A Sample Balance Sheet

Below we look at the balance sheet for Nov 30, 2011 and comment on key features. We have numbered the key lines in the left-hand column. For anyone wishing to get a historical, graphical perspective on any line item, go to FRED and select click on the data series you wish to see.

Balance Sheet Assets (Millions of dollars)

The assets shown on this sheet are largely those purchased by the Fed with new money. We will include appropriate graphs for items we examine in detail.

Selected notes in the table. See the original source for the rest.

  • 2. Face value of the securities. Note these are not marked to market. Their market value may be more or less than the amount shown.
  • 4. Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae (GSEs). Current face value of the securities, which is the remaining principal balance of the underlying mortgages.
  • 11. Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank.
Commentary On Assets By Line

Line 1 represents a claim on US sovereign gold holdings. The following comment comes from the Federal Reserve bank of St. Louis Recent holdings data set (bolding is ours):

The gold certificate account reflects the receipts issued to the Reserve Banks by the Treasury against its gold holdings. In return, the Reserve Banks issue an equal value of credits to the general account of the Treasury, computed at the statutory price of $42.22 per troy ounce. Because nearly all of the gold held by the Treasury has been monetized in this fashion, the Federal Reserve Banks’ gold certificate account of $11 billion represents the nation’s entire official gold stock.

We present a more detailed examination of the US gold holdings in the post The Gold Holdings of the US.

Line 2 represents IMF issued special drawing rights, the money of central bankers.

Lines 4 through 12 are examined in more detail and tracked in the post Tracking the Ownership of US Debt.

Lines 6 through 14 represent assets purchased from primary dealers, including those purchased under the programs known as Quantitative Easing (QE) 1 and QE 2.

Lines 15 through 19 represent assets acquired under special programs, implemented at various times in the current crisis that began in 2007, to rescue financial institutions whose failure risked the collapse of the financial system. An analysis of these holdings could be the subject of several posts. For more information on the Maiden Lane transactions see Maiden Lane Transactions.

Line 22 is an important line to watch. The Fed agreed in Early Dec. 2011 to do currency or liquidity swaps with European central banks if they needed access to emergency supplies of dollars. A liquidity crisis in Europe could see this line expand considerably. Question: is this QE?* Further detail on this line may be found at the Fed site Credit and Liquidity Programs and the Balance Sheet. Activity is tracked in the post Tracking the Wiley Swap.

Line 23 is larger in size than any other holding except the primary security portfolio of line 5. There have been questions raised as to what might be hidden in this line item described as “other”.

Line 24 is the total amount of assets the Fed has. For the recent history of this line item go to FRED or the post Tracking the Fed Balance Sheet.

Balance Sheet Liabilities (Millions of dollars)

The liabilities shown on this page are obligations that the Fed has to other parties. We have numbered the key lines in the left-hand column.

For notes in the table see the original source

Commentary On Liabilities By Line

Line 1 is the amount of currency in circulation. We discuss currency in detail in Understanding Money: Part 4 – The Value of Money in the section on the Federal Reserve Note. For a graphical picture of the history of currency in circulation see FRED. This liability is to the people of the United States and abroad.

Line 2 represents special transactions with counterparties designed to extend liquidity to the counterparty during this crisis.

Lines 4 through 9 represent accounts that counterparties have with the Fed in which the counterparties have deposited funds. Like deposits in a commercial bank, these become a liability to be repaid on demand. Lines 4 and 5 represent approximately the excess reserves commercial banks have on deposit with the Fed. This is mostly “new” money that has not undergone the multiplier effect of the fractional-reserve banking system. It could have a huge inflationary effect if it came into circulation en mass.

Lines 6 and 7 represents the accounts the Treasury department has with the Fed. See Federal Reserve Returns $77 Billion to the Treasury for 2011 for an explanation of what the Fed returns to the treasury through these accounts.

Line 12 is the total amount of liabilities the Fed has. For the recent history of this line item go to FRED.

Line 13, total capital, is an accounting item to make the liability and asset sides of the balance sheet, balance. It is one statement of what the Fed is worth. Since its assets are not however, marked-to-market to give a current fair market valuation, it is an accounting fiction.

The Other Tables of H.4.1

Table 1AMemorandum Items

The interest in this table is that it shows Marketable securities held in custody for foreign official and international accounts. Who holds the US external debt of interest to many analysts and writers. Consequently, we track it in a post, Tracking the Ownership of US Debt.

Table 2Maturity Distribution of Securities, Loans, and Selected Other Assets and Liabilities

This table gives a macro-breakdown of the maturity distribution of the various forms of debt the Fed has purchased. Changing this distribution is one monetary tool the Fed has for influencing interest rates. In an article titled Fed launches $400bn ‘Operation Twist’, the Financial Times noted that the Fed would buy $400bn of long-dated Treasuries, financed by the sale of an equal amount of bonds with three years or less to run in an attempt to drive down long-term interest rates and hopefully stimulate the economy. The Fed’s news release is found here.

Selling shorter duration notes drives their price or market value down in an attempt to attract buyers. This raises the effective interest rate of notes of that duration. The inverse happens when they go to buy longer duration debt; its price goes up and the associated interest rates drop. There are two implications to note. The first is that because of the size of their market interventions, they do influence prices. When they go to unwind their positions, all else being equal, they will get a lower price for their debt than what they paid for it, suffering a loss. If in the meantime interest rates have gone up appreciably, the loss could be very large.

The other effect of increasing the average duration of their portfolio is it gives them some flexibility in finding an optimal time to sell. We do not follow the change in duration at this time.

Table 4, Table 5, Table 6, Table 7

These table contain information on the assets acquired as a result of specific programs introduced to defuse the financial crisis in 2008. They are principally of historical interest at this point since the programs are closed and the assets acquired are being unwound.

Tables 10, Collateral Held against Federal Reserve Notes: Federal Reserve Agents’ Accounts

This is a rather obscure but very interesting table in that it shows exactly what US currency is backed by. In particular, we note the line  Gold certificate account. In fact this represents a claim on most of the US gold stock. We comment more on this in our post The Gold Holdings of the US

Key Points

Since the financial crisis began in 2007, the Fed has intervened in massive and extraordinary ways in financial markets. The footprints of these interventions appear as assets acquired on the balance sheet. The recent

Most assets on the Fed’s balance sheet are someone else’s liabilities, principally the Treasury’s. Exceptions are currency accounts, coin and gold certificates which have an underlying intrinsic value.

A point to be careful of is, for asset values shown, are they nominal amounts or real amounts? “Nominal” refers to what you paid for the asset. “Real” refers to the current market value of the asset. As an example, you may own a Greek 1-year bond with a face or nominal value of 100 euros. It’s real value today were you to try and sell it might be 3 euros. In short, what is the integrity of the Fed’s balance sheet?

Finally, some nice graphics from Cumberland Advisors (click on image to open):

The presentation that opens has a number of pages at the end, of explanation of terms and the data pictured.

*Bloomberg ran an article, Dec. 11, titled: No One Telling Who Took $586B in Fed Swaps. The article deserves comment which we make in point form with the appropriate quotations:

  1. the Fed lends dollars to other central banks, which auction them to local commercial banks. This is exactly what a liquidity or currency swap is as noted above.
  2. the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent. It is no business of the Fed’s where the dollars end up. Their business is strictly with their counterparty in any swap, in this case, the ECB. There are two risks in a swap transaction, loss of value and loss of asset. If a currency swap is unwound at an exchange rate different from the rate in effect for the swap, one party may lose money on the swap while the other party gains. To eliminate such potential loss of value, the swap is conducted with the specification that the exchange rate for unwinding the swap will be the same as for setting it up. This makes the swap value neutral and, as noted above, this is the way the Fed conducts currency transactions. Loss of asset can occur if the ECB fails as an institution and is not backstopped by a sovereign entity (which it is not). This won’t happen any time soon if at all.
  3. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries. There is no more lack of openness that that which exists in the Fed’s dealings with its private sector counterparties.
  4. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million. This has nothing to do with the Fed as shown by the lack of activity in its swap position. The “surge” referenced by a link is in the swap rate, not the swap amount.
  5. The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act… The author failed to note that the Dodd-Frank act does not yet cover foreign central banks due to the minor issue of national sovereignty.
  6. The Fed swap program had a combined balance of $2.3 billion in loans outstanding as of Dec. 7 for all five participating central banks. That doesn’t account for the ECB’s latest dollar auction because the loans hadn’t settled yet. The article does not substantiate the implication that the ECB swaps mentioned with its member banks required an offsetting swap with the Fed. The ECB will have at any time, a quantity of dollars on hand for such occasions, requiring a swap with the Fed only if they run out. We don’t know how long it takes to “settle” a swap transaction but if the Fed is involved, it will be visible shortly.
  7. One of the borrowers, Dexia SA (DEXB), is being broken up after running out of short-term funding. The French-Belgian lender had 120.6 billion euros of central-bank liabilities on Dec. 31, 2008, according to a company report; $58.5 billion came directly from the Fed, the Bloomberg examination showed. This raises several issues. This is a transaction directly between the Fed and the commercial bank Dexia. Applying the new provisions under the Dodd-Frank act, Fed borrowers from the discount window and presumably swap lines are subject to identification with a two-year delay. These swaps are unwound long before the counterparty needs to be identified. Forcing European central banks to adopt the same degree of transparency would buy nothing.

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