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A Probability-Based Stress Test of Federal Reserve Assets and Income

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Listed:
  • Christensen, Jens H. E.

    (Federal Reserve Bank of San Francisco)

  • Lopez, Jose A.

    (Federal Reserve Bank of San Francisco)

  • Rudebusch, Glenn D.

    (Federal Reserve Bank of San Francisco)

Abstract

To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed's associated interest rate risk--including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed's losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation.

Suggested Citation

  • Christensen, Jens H. E. & Lopez, Jose A. & Rudebusch, Glenn D., 2013. "A Probability-Based Stress Test of Federal Reserve Assets and Income," Working Papers 14-01, University of Pennsylvania, Wharton School, Weiss Center.
  • Handle: RePEc:ecl:upafin:14-01
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Do central banks need capital?
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-05-26 17:19:47
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      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-08-23 18:43:47
    3. Open Letter to Senator Rand Paul
      by Stephen G. Cecchetti in Huffington Post Business on 2015-09-06 19:54:41

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    Cited by:

    1. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    2. Diego Caballero & André Lucas & Bernd Schwaab & Xin Zhang, 2019. "Risk endogeneity at the lender/investor-of-last-resort," BIS Working Papers 766, Bank for International Settlements.
    3. Daly, Pierce & Moloney, Kitty, 2017. "Liquidity & Risk Management: Results of a Survey of Large Irish-Domiciled Funds," Quarterly Bulletin Articles, Central Bank of Ireland, pages 48-62, July.
    4. Robert E. Hall & Ricardo Reis, 2015. "Maintaining Central-Bank Financial Stability under New-Style Central Banking," NBER Working Papers 21173, National Bureau of Economic Research, Inc.
    5. Jens H. E. Christensen & Signe Krogstrup, 2016. "A Portfolio Model of Quantitative Easing," Working Paper Series 2016-12, Federal Reserve Bank of San Francisco, revised 23 Aug 2017.
    6. Jane Ihrig & Elizabeth Klee & Canlin Li & Min Wei & Joe Kachovec, 2018. "Expectations about the Federal Reserve’s Balance Sheet and the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 341-391, March.
    7. R.J. Galema & S. Lugo, 2017. "When central banks buy corporate bonds: : Target selection and impact of the European Corporate Sector Purchase Program," Working Papers 17-16, Utrecht School of Economics.
    8. Todd Keister & Antoine Martin & James J. McAndrews, 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    9. Jörg Bibow, 2018. "Unconventional monetary policies and central bank profits," IMK Studies 62-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Donnery, Sharon & Doran, David & Gleeson, Ruth & Carroll, Konstantina, 2017. "Non-standard Monetary Policy Measures and the Balance Sheets of Eurosystem Central Banks," Quarterly Bulletin Articles, Central Bank of Ireland, pages 79-94, July.
    11. Jens H. E. Christensen & Glenn D. Rudebusch, 2019. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt," The Review of Economics and Statistics, MIT Press, vol. 101(5), pages 933-949, December.
    12. De Genaro, Alan, 2016. "Systematic multi-period stress scenarios with an application to CCP risk management," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 119-134.
    13. Kaminska, Iryna & Zinna, Gabriele, 2019. "Official demand for US debt: implications for US real rates," Bank of England working papers 796, Bank of England.
    14. Joerg Bibow, 2018. "Unconventional Monetary Policies and Central Bank Profits: Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis," Economics Working Paper Archive wp_916, Levy Economics Institute.
    15. Caballero, Diego & Lucas, Andr e & Schwaab, Bernd & Zhang, Xin, 2019. "Risk endogeneity at the lender/investor-of-last-resort," Working Paper Series 382, Sveriges Riksbank (Central Bank of Sweden).
    16. Christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," DNB Working Papers 510, Netherlands Central Bank, Research Department.
    17. Abdymomunov, Azamat & Gerlach, Jeffrey, 2014. "Stress testing interest rate risk exposure," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 287-301.
    18. Engle, Robert & Roussellet, Guillaume & Siriwardane, Emil, 2017. "Scenario generation for long run interest rate risk assessment," Journal of Econometrics, Elsevier, vol. 201(2), pages 333-347.
    19. Atsushi Tanaka, 2020. "Central Bank Capital and Credibility: A Literature Survey," Discussion Paper Series 208, School of Economics, Kwansei Gakuin University, revised May 2020.
    20. Devine, Kenneth & Dooley, Jennifer & Meehan, Ciaran & Menton, Aisling, 2017. "Consolidated Banking Data: Introducing Enhanced Statistics for Ireland," Quarterly Bulletin Articles, Central Bank of Ireland, pages 63-78, July.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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