Finance and capital markets
- Banking 1
- Banking 2: A bank's income statement
- Banking 3: Fractional reserve banking
- Banking 4: Multiplier effect and the money supply
- Banking 5: Introduction to bank notes
- Banking 6: Bank notes and checks
- Banking 7: Giving out loans without giving out gold
- Banking 8: Reserve ratios
- Banking 9: More on reserve ratios (bad sound)
- Banking 10: Introduction to leverage (bad sound)
- Banking 11: A reserve bank
- Banking 12: Treasuries (government debt)
- Banking 13: Open market operations
- Banking 14: Fed funds rate
- Banking 15: More on the Fed funds rate
- Banking 16: Why target rates vs. money supply
- Banking 17: What happened to the gold?
- Banking 18: Big picture discussion
- The discount rate
- Repurchase agreements (repo transactions)
- Federal Reserve balance sheet
- Fractional Reserve banking commentary 1
- FRB commentary 2: Deposit insurance
- FRB commentary 3: Big picture
Federal Reserve balance sheet
Analysis of the federal reserve balance sheet as of Feb 2007. Created by Sal Khan.
Want to join the conversation?
- At8:53, why would a bank deposit money at the Federal Reserve when it gets no interest on it?(13 votes)
- The mandatory reserve requirements are a combination of a bank's cash in their vault and the amount they have in a Federal Reserve Deposit Account (basically a bank's checking account). The funds in this account can be wired to other banks in the event they make or repay loans to other banks (at least more easily than delivering cash in an armored car), just like what Sal talked about in his video on the Fed Funds Rate.(10 votes)
- Notes Outstanding apparently offset FRNs in circulation. Since Notes Outstanding are liabilities, the FRNs they offset must amount to some sort of IOU. If I try to "redeem" my FRN (my IOU), what do I get in return? In short, what exactly does the FED owe me if I hold FRNs that I want to redeem?(15 votes)
- I think you can get another FRN of equal face value in return. And yes I know that sounds useless and so it isn't really a liability anymore unlike during the times we were under the gold standard.(3 votes)
- I would like to see a video on the pro's and con's of the federal reserve. I would also like to know professor Khan's personal opinion of whether he thinks the United States is better off with or without.(9 votes)
- Sure there is, 100% reserves is one (theory by Irving Fisher). Functional finance is another (theory by Abba Lerner).
Actually the governor of the bank of England Mervyn King said October 25th 2010:
"Of all the many ways of organising banking, the worst is the one we have today."
So today's system is not the only one. It is the worst one.(5 votes)
- Sal asks for us at3:14. What is a "special drawing rights certificate account?"
The IMF kindly explains their counterfeit policy here http://www.imf.org/external/np/exr/facts/sdr.htm/ Can we find an example of a less biased description on the web somewhere? Could we discuss perspectives of good or bad SDR's? Do these provide a service better than the available alternative means?(6 votes)
- The Fed shows in its balance sheet(Aug 10,2011) Gold at $11,037 millions. But it is evaluated at $42 per ounce; interesting considering that the gold spot today is $1852. The amount of gold hold by the Fed is 8,134 Tonnes or 261499K ounces. In other words, in today times, the value of gold in the Fed's BS should worth $484,296 millions. Not bad if you know that on Aug 10,2011, the total asset worth $2,876,236 millions. Why is the Fed holding that gold ?(3 votes)
- because they know that gold will keep appreciating relative to the US Dollar as they keep printing more and more paper money. Since printing more money makes the dollar depreciate.(2 votes)
- How is it that Hank Paulsen had to go to Congress for TARP approval which showed up as government debt, but Ben Bernanke can find trillions of dollars to purchase "troubled assets" and he doesn't need Congress's approval and the money doesn't show up as debt? Where does he get the money?(2 votes)
- Because the Federal Reserve is not part of the federal government, The Federal Reserve is a private bank which was given a monopoly over the printing of currency by our government for which there is some oversight by Congress but little actual accountability to it.(1 vote)
- In the financial statement of a normal Bank - Depositors money is quoted as ASSETS, but here for the Federal Reserve, I see that the money from other banks that is held with the FED are quoted as LIABILITIES. Why is that so?(2 votes)
- Is it true the the Fed now pays interest on deposits that banks have with them? Is that why they suddenly have $2+ trillion of deposits in their liabilities on the current balance sheet?
Are we essentially paying the banks to hoard their money? That can't be right.(1 vote)
- Two points:
1) The banks aren't really hoarding money. These are reserves that are held on deposit at the Fed and are primarily used to settle payments between banks. A bank can't just withdraw reserves and do whatever they want with them. They could create a loan to lend out these reserves, which the banks would love to do because it would pay far more than the Fed is paying in interest. Unfortunately there aren't enough credit worthy borrowers right now to lend to.
The second reason goes well beyond the scope of these videos, but I'll try to make it as clear as possible...
2) Interest paid on reserves is essentially now the Fed funds rate. When the Fed wants to raise short term interest rates they would traditionally reduce the amount of reserves in the banking system. They would sell treasuries and the banks would pay for treasuries using reserves. This is difficult when you have so much excess reserves floating around. The Fed would have to sell an incredible amount of treasuries, so withdrawing all of those reserves would be next to impossible. So, how do you raise interest rates? Paying interest on the reserves solves that problem. If the Fed wants to raise short term interest rates, they just need to pay more interest on reserves and they won't have to sell any treasuries to lower the level of reserves. Reserves would stay at current levels and interest rates would rise.(2 votes)
- What liability entry represents the sum of reserve deposits required of the individual banks?
I see $17B labelled "depository institutions". Is that full amount for all US banks? That seems low to me.... If that is the total it is interesting to me that the amount is such a tiny percent of total liabilities. Thx(1 vote)
- The $17 billion is amounts that depository institutions have on deposit at the fed. The vast majority of a bank's deposits are not in turn deposited at the fed, they are lent out.(2 votes)
- what happens in theory to the FED balance sheet if the US Gov defaults on the whole or part of his debt (Treasuries)?(1 vote)
- The Fed issues currency (US Dollars) like any other company would issue common stock. Right now, the Fed has issued a lot of that stock (four trillion and counting) to purchase US government guaranteed securities. The Fed plans to let those securities mature and then simply "buyback" its stock by holding onto the USD proceeds. If the government were to default on those debts, then the Fed would be unable to repurchase the new shares it has issued and, very likely, the value of the existing outstanding shares (US dollars) would be diluted and decline in value. However, there would be several other major consequences and reactions to a Treasury default, so this isolated analysis should not be seen as fully encompassing.(1 vote)
I think you'll find this video exciting because until now, we've just been talking about the Federal reserve in the abstract and I was drawing little boxes to represent balance sheets, but this is the actual Federal reserve balance sheet and I took a date that was before all of this silliness started happening in the banking sector just so we could kind of see what a Federal reserve balance would've looked like in a normal environment. And then we can actually, in future videos, compare what they've done since then and then we can get a better insight into all of the different machinations that the Federal reserve has done to kind of try to keep banks liquid and solvent and to keep everything going. And we can debate whether they've been good or bad or they're just keeping banks in kind of zombie mode. But anyway, this is the Federal reserve's balance sheet as of February 14th, 2007. So before all the craziness happened, although a little bit started-- this is before the Feds started taking really aggressive action to provide liquidity for the markets. But here the assets. So first of all, we have the total assets number. That's just interesting to look at. These are all in millions. So this is $871 billion of assets. Let's just get the big picture. Let me draw that here in our traditional box diagram. So if I were to draw the assets-- the sum of all the assets over here is $871 billion, and we know that the liabilities plus equity better add up to $871 billion. Let's see. What's the total liabilities? Total liabilities is $839 billion-- so give or take $840. So the liabilities-- I'll do it in a different color. The liabilities are $840 billion, give or take a little bit. They should have the same width, not that the width matters that much. And then whatever's left over should be equity, right? Assets minus liabilities. What you have minus what you owe is what you're left with for the owners. And of course, owners of the Federal reserve, you kind of have to take with a grain of salt. They really don't have the upside of traditional owners. They're really just kind of stakeholders. What's left over is the equity. It should be roughly $31 billion. And let's confirm that by looking at the actual balance sheet. And here we have it-- total capital is $31 billion. So big picture, so far it's kind of meeting up with how we've envisioned a Federal reserve balance sheet, but let's dig a little deeper and see if we can find interesting things and things we've talked about. And hopefully at this point, we should actually understand all of it. Let's focus on the assets for now. So the assets are just this part of it. OK. So it has-- this is what? This is $11 billion of gold certificate accounts and that's some type of rights on gold. Let's see. Gold certificate accounts. Let's see if they have any other gold anywhere. Coin-- $1 billion. But this is all small potatoes, right? I don't know what special drawing rights certificate account is, but it's very small relative to the big pie, right? There's $871 billion of assets. This is just kind of almost rounding-off error. Here we have a big chunk of something. Actually, I think this $11 billion is actual gold because I don't see it anywhere else on their assets. So I think if you combine roughly-- I don't know what this thing here is, but if you combine this and this, it's saying that the Federal reserve is-- because I don't see gold anywhere else here-- that it's holding roughly $12 billion worth of gold, which really isn't a lot of gold when you consider the total size of its balance sheet. The big piece right here-- let me pick a different color. I'll do it in the purple. It has securities, repurchase agreements, and loans-- $808 billion-- almost $809 billion. So this is a big piece of the Fed's balance sheet. Out of the whole $871, $808. So pretty much it's almost like that much of it. Actually, maybe a little bit less of that-- are these securities and things like that. Let's see what kind of securities they have. And they break them down. So this $808 billion is made up of these things right here. The bulk of them are U.S. treasury loans, right? So these are going to be bills, notes, and bonds-- OK. So just to explain, a treasury bill-- and I've done videos on this-- this is essentially a loan to the government for a year or less. So it's just a loan to the government that matures in a year or in three months. Notes and bonds-- these are loans to the U.S. treasury that have longer maturities. Notes are up to 10 years. Bonds are more than 10 years. And then inflation index bonds-- I'll do a whole video on that in the future, but these are essentially treasuries that are indexed to inflation so you can kind of hedge out a little bit of your inflation risk. But, needless to say, the big picture is is that $780 billion of the Fed's assets are treasuries, loans to the Federal government. Let me draw that here. So a pretty big piece, roughly that much is treasury. So most of what the Federal reserve owns are treasuries. And that's consistent with everything we've gone over so far and that account for everything up to here. And then what's interesting-- what we just talked about-- repurchase agreements, $30 billion. And I don't know 100%, but I'm guessing that these are-- someone came to the discount window and essentially borrowed $30 billion from the Fed-- and it's not just someone. It's probably multiple people came and borrowed $30 billion from the Fed-- and they gave treasuries as collateral, but as we know, just the way repurchase agreements work, they actually kind of sold the treasuries to the Fed and the Fed agreed to buy it later, but it's essentially collateral. So these repurchase agreements-- they're included in these securities because they're not just agreements, right? They actually are-- they're probably treasuries or they might be other types of highly rated securities and we'll learn in future videos that the Fed has lowered its standards over the last year in terms of what type of collateral or what type of securities it's willing to trade in these repurchase agreements, but in the situation it looks like about $30 billion. And you can also-- you get a clue of what repurchase agreements are because here, they say securities held outright, right? So there's no repurchase agreement. There's not some contract where they say they're going to sell this to someone else at another price. These are repurchase agreements. These are kind of more collateral for loans. And then they have outright loans-- $39 million. That's pretty much peanuts in the Federal reserve world. So the bulk is treasuries, a little bit of repurchase agreements, and then there's other assets. They don't break out what this is. Maybe there's some gold in that. I'm not sure. Bank premises, the buildings of the Federal reserve are worth $2 billion. I mean, they have 12 banks around the country and I'm sure they have a bunch of other things. And then items in process collection. I don't know what these things are, but these are all small potatoes. The big thing is that the Federal reserve's assets are predominantly U.S. treasuries-- at least, they're predominantly treasuries right now. Now let's look at the liabilities. And to some degree, this is much more interesting. So Federal reserve notes, net of Federal reserve bank holdings. So $769 billion. So when I talked about notes outstanding, that's what this is. These are Federal reserve notes that have been printed and they're liabilities, right? Because the Federal reserve bank printed these notes and then used them as currency and so they're liabilities now because someone can come back another time and say, hey, give me back the value of these things and that's a bit of an abstract concept, but roughly $700 something of this are notes outstanding. This is money that the Federal reserve had printed. And then there's some reverse repurchase agreements, which essentially-- see for some reason, the Federal reserve used repurchase agreements to borrow from someone else. It has a little bit of deposits, right? And these deposits have actually grown dramatically in the past year. Has $22 billion of deposits. So these are actually deposits that banks are keeping with the Federal reserve. The U.S. treasury actually keeps some money there. Depository institutions have $17 billion-- and actually, that's how the Federal reserve traditionally has paid its expenses. People put deposits with the Federal reserve-- so let's say these are deposits from banks. It's a very small piece. It's like $17 billion. These could be deposits from member banks, but the Federal reserve does not pay interest in these deposits. They don't pay interest on these deposits and then they can take these deposits and by treasuries or other securities and get interest on them. So they're essentially getting free interest and that's what they used actually to fund their operations. Any excess after funding their operations goes back to the U.S. Treasury so it's not like Ben Bernanke can fly around or drive a Bentley or something. And then I don't know what this is-- foreign official-- these are nothing items. So the bulk of it is money that had been printed and that's a liability of the Federal reserve now. And then there's a little bit of deposits from depository institutions. And the treasury has kept some money with the Federal reserve as well. And then everything left over is the equity. Anyway, I thought that would be pretty neat to see that you can actually look at what the Federal reserve's balance sheet is right now. You can actually just do a web search for it. You'll find it in a bunch of different sources. And you can actually analyze it. You now have the tools to look at that and make sense of it. And what's even more interesting is to compare this balance sheet with the current Federal reserve balance sheet and then you can know everything that they've been up to.