The Federal Reserve Balance Sheet

When I wrote my Ph.D. dissertation, I spent a lot of time looking at the Federal Reserve balance sheet. Since then my interests in economics have expanded, but I still maintain a bit of interest in monetary policy and monetary history. Because I have not seen anyone write about it, I decided to take a look at what the Fed has been up to, as revealed by its balance sheet, as a result of the current financial panic.

The balance sheet certainly shows some very strange things happening. The reserve balances with Federal Reserve Banks have exploded in past week. They were a mere $5.561 billion in the week ending Sept 19, 2007 but were a huge $46.996 in the week ending Sept 17, 2008. This increase is almost entirely the result of the financial panic because data for the week earlier show reserve balances of only $7.978 billion.

Banks normally do not hold much in their accounts at the Fed. They mostly meet reserve requirements with the cash they have in the ATM machines. (I once had a student who worked for a bank, and I asked her how much was in an ATM because she said she knew. She replied that if she told me the answer, she would have to kill me, so I still do not know how much cash is in an average ATM.) It may be that banks are holding these large amounts because in times of panic, cash is king. It may be that they do not want to loan excess reserves to other banks because trust has broken down. But that is a guess. I really do not know what banks are doing with such large reserve balances.

Another oddity is the huge decline in U.S. securities held outright by the Federal Reserve, which fell from $780 billion for the week ending Sept 17, 2007 to $480 billion for the week ending Sept 17, 2008. The big increases over the year were in repurchase agreements (in which the Fed buys U.S. government securities with the agreement to resell them in a few days, a way to temporarily inject funds into the financial markets), and in an item called Term Auction Credit. This last time is the account showing how much of nontraditional debt the Fed is holding as it attempts to help financial institutions. It is a new thing that has appeared as the Fed has tried to help the financial institutions recover from their huge holdings of rotten mortgage-backed securities.

Another interesting table shows the breakdown of reserves. For the two weeks ending September 10th banks held $47.112 billion in total reserves, of which $169.480 billion was borrowed. (Total Reserves minus non-borrowed reserves, or 47112-(-122368).) The banks are borrowing more than they have in reserves, which happens because the Fed sells securities to offset some of the borrowing. I have to say that I do not understand some of these numbers. Too much has changed at the Fed since the time I was paying attention to what they were doing.

Update: Megan McArdle has a post on how close we came to a financial meltdown.