zondag 11 februari 2018

Central Bank Solvency

This page is created to monitor the Federal Reserve Bank's solvency.

Very nice article on the Federal Reserve and its interest payments to the banks.

http://www.businessinsider.com/fed-paid-banks-30-billion-on-excess-reserves-for-2017-2018-1?international=true&r=US&IR=T

One wonders what will happen when yields go up and the FRB unwinds its balance sheet in this environment. Will it have enough revenue to pay these interests on excess reserves, especially with higher fed funds rates. Will it have enough money left to remit to the treasury? We already see these remittances to the treasury going down since 2015. More debt will be issued once the treasury is empty again. By law, the Fed is only allowed to have 5% ROI on its investments per year (at 20:00 mark), the rest needs to be remitted to the Treasury. Once the Fed has a negative ROI, the Treasury needs to pay for the Fed's losses.


Remittances can be found here too:
https://research.stlouisfed.org/datatrends/usfd/page9.php




The Fed started to pay interest on reserve balances at the Fed since 2008, to address conditions in credit markets.

https://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves/ 

Interbank loans dropped because there was no need to lend money to each other. The Fed gave free money.


Once the Fed becomes insolvent (because interest rates rise), it will have to monetize and create even more money. It won't be able to execute remittances anymore to the treasury. It won't be able to pay interest on excess reserves to the banks. In fact, the Treasury will need to pay for the Fed's losses. This paper explains it perfectly.

https://minneapolisfed.org/research/wp/wp747.pdf

The capital buffer can be found here and is at $45 billion (2018).
https://www.federalreserve.gov/releases/h41/current/

More info on central bank solvency: https://www.zerohedge.com/article/federal-reserve-insolvent

Excess reserves are shown below.


And by the way, the central bank is on its way to becoming insolvent as unrealized losses are growing.


https://www.federalreserve.gov/releases/h8/current/

You can see here that when bond yields go up, the unrealized losses will go up.


And each time, these losses worsened, the Federal Reserve started another round of QE.


One of my favourite tools to see if the Fed is in deep trouble is the cash balance at the U.S. treasury.
Can also be found here: https://www.federalreserve.gov/releases/h41/current/ 
=> Deposits: U.S. Treasury, General Account

(the small peak to $300 billion in the Treasury in 2018 was due to the repatriation of money back to the U.S. via Trump tax cuts)

http://katchum.blogspot.be/2017/04/us-treasury-cash-balance.html

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