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

  • Peter Stella
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    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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    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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    1. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    2. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
    3. Rebecca McCaughrin & Simon Gray & Alexandre Chailloux, 2008. "Central Bank Collateral Frameworks; Principles and Policies," IMF Working Papers 08/222, International Monetary Fund.
    4. 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.
    5. Peter Stella & Seiichi Shimizu & Simon Gray & Ulrich H. Klueh & Alexandre Chailloux, 2008. "Central Bank Response to the 2007-08 Financial Market Turbulence; Experiences and Lessons Drawn," IMF Working Papers 08/210, International Monetary Fund.
    6. Charles Enoch, 1997. "Transparency and Ambiguity in Central Bank Safety Net Operations," IMF Working Papers 97/138, International Monetary Fund.
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