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The Federal Reserve System Balance Sheet-What Happened and Why it Matters

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  • Peter Stella
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    Abstract

    The recent expansion of the balance sheet of the consolidated Federal Reserve Banks (FRB) is analyzed in an historical context. The analysis reveals that the nature of Fed involvement in U.S. financial markets has changed dramatically and its expansion is several orders of magnitude beyond what is usually reported. The associated fiscal risks and potential exit strategies are then considered. Although risks are considerable in certain unlikely scenarios, FRB capital, earnings capacity, and reserves are more than ample to preserve their financial independence. Nevertheless, the occurrence of losses or a significant drop in FRB profit might lead to an eventual curtailment of Fed operational independence. The paper concludes by considering options to enhance FRB risk management and to assign responsibilities for monetary, financial stability and fiscal policies once the current crisis is overcome.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/120.

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    Length: 60
    Date of creation: 01 May 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/120

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    Related research

    Keywords: Central bank policy; Commercial banks; Credit risk; Financial risk; Financial systems; Liquidity management; Monetary reserves; Risk management; central bank; monetary policy; banknotes; banking; bank deposits; foreign exchange; inflation; banknote; bank assets; monetary authority; monetary fund; bank capital; bank reserves; bank liquidity; government securities; money market; national bank; treasury securities; bank independence; bank of england; bank of japan; open market operations; reserve requirement; monetary statistics; monetary policy independence; financial strength; banking system; monetary policy implementation; monetary base; interest expense; bank balance sheet; savings bank; monetary authorities; balance sheet growth; bank risk; banking systems; mutual savings bank; discount rate; bank of canada; central ? bank; bank of korea; reserve ratios; bank operations; paper money; credit policy; government securities holdings; bank board; banking sector assets; long-term interest rates; bankrupt; monetary policies; bank financing; bank of thailand; banking community; bank finance; bank failures; monetary aggregates; bank borrower; independent monetary policy; liquid asset; bank loss; bank intermediation; interbank money market; probability of default; banking sector; independent monetary authority; banking capital; bank ? independence; bank safety net; bank policy; reserve ? surplus; interbank market; monetary stance; monetary stability; bank cash; bank equity; investment bank; return on equity; bank safety; holdings of government securities; cost of credit; monetary authority of singapore; bank money; monetary policy instruments;

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports, Federal Reserve Bank of New York 338, Federal Reserve Bank of New York.
    2. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 19(3), pages 418-437, July.
    3. Peter Stella & Seiichi Shimizu & Simon Gray & Ulrich H. Klueh & Alexandre Chailloux, 2008. "Central Bank Response to the 2007-08 Financial Market Turbulence," IMF Working Papers 08/210, International Monetary Fund.
    4. Charles Enoch, 1997. "Transparency and Ambiguity in Central Bank Safety Net Operations," IMF Working Papers 97/138, International Monetary Fund.
    5. Rebecca McCaughrin & Simon Gray & Alexandre Chailloux, 2008. "Central Bank Collateral Frameworks," IMF Working Papers 08/222, International Monetary Fund.
    6. Benjamin M. Friedman, 1999. "The Future of Monetary Policy: The Central Bank as an Army With Only a Signal Corps," NBER Working Papers 7420, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Pikkarainen, Pentti, 2010. "Central bank liquidity operations during the financial market and economic crisis: observations, thoughts and questions," Research Discussion Papers, Bank of Finland 20/2010, Bank of Finland.
    2. Kotaro Ishi & Kenji Fujita & Mark R. Stone, 2011. "Should Unconventional Balance Sheet Policies Be Added to the Central Bank toolkit? a Review of the Experience so Far," IMF Working Papers 11/145, International Monetary Fund.

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