![]() A central bank is “supposed” to be mostly independent from their government. ![]() federal government.Īnd that detail is actually pretty important. By law, that’s how it works, and the Federal Reserve is a source of profit for the U.S. The majority of the profit was handed to the U.S. Some of it went to pay for operating expenses of the Federal Reserve, and some of it was paid out as a dividend to the shareholders of the Federal Reserve (which are the commercial banks themselves). In 2021, the Federal Reserve earned $100+ billion in net interest income. The Federal Reserve has a small number of other items that count as assets or liabilities, but those listed above represent the vast majority of the balance sheet. At the time they did this, Treasuries and MBS paid higher interest rates than bank reserves. To perform quantitative easing, the Federal Reserve created more liabilities (bank reserves) for itself and used those to buy more assets (Treasuries and MBS) for itself. The Fed pays no interest on its physical bank note liabilities, and gets to set the rate it pays on its bank reserve and reverse repo liabilities.Īssets of the Federal Reserve consist mainly of Treasuries and mortgage-backed securities, and most of those came from prior rounds of quantitative easing. These are bearer assets that are kind of like having a deposit at the Fed, except they are physical and can be traded around. Lastly, all physical cash dollars are liabilities of the Federal Reserve. Reverse repo operations are also liabilities of the Federal Reserve, and they pay sizable interest rates. Treasury Department also maintains a cash account at the Federal Reserve, and this represents basically the checking account of the federal government. These deposits, known as “reserves” are assets for the banks and liabilities for the Federal Reserve, and the Federal Reserve pays interest on them. Much like how individuals and businesses deposit their cash at a commercial bank, commercial banks deposit their cash at the Federal Reserve. Liabilities of the Federal Reserve consist mainly of bank deposits and banknotes. For the United States, the central bank is called the Federal Reserve. Central Bank Assets and LiabilitiesĪ central bank has a rather similar balance sheet structure to a normal commercial bank, with assets and liabilities as well. They pay a small amount of interest income to their depositors, and collect way more interest income on their various assets. Even when we factor out some intangible items, mainly referring to their $69 billion in goodwill, their equity is still positive.Īnd importantly, Bank of America’s assets generate a much higher average yield than their liabilities, so they have positive interest income. Their assets exceed their liabilities, meaning they have positive shareholder equity. To use Bank of America ( BAC) as an example, they have $3.051 trillion in assets and $2.778 trillion in liabilities as of the end of 2022. ![]() The loans and securities can include mortgage loans, business loans, personal loans, credit card loans, various Treasury securities, and other more complex securities. ![]() On the other side of the ledger, bank assets consist of various loans, securities, and cash that they hold at their central bank. That serves as the source of financing for banks they are basically borrowing from depositors at very low rates. Individuals or businesses deposit money at the bank, and those deposits in various forms (checking accounts, savings accounts, certificates of deposit, and so forth) are considered liabilities or “IOUs” for the bank and assets for the depositors. In order to remain solvent, the asset side must exceed the liability side, and they have various regulations placed on them to try to keep them as solvent as possible.įor a typical bank, their liabilities mainly consist of deposits. Commercial Bank Assets and LiabilitiesĪ commercial bank has a considerable amount of both assets and liabilities. This article explores how we got here and to what extent any of this matters for savers and investors. Federal Reserve is now operating at a financial loss, and is months away from having negative tangible equity for the first time in modern history.
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