Published on 01-12-2011
The Financial Times reports the financial crisis has helped the U.S. Federal Reserve become the most profitable bank in history.
According to the the Fed, it turned an $80.9 billion profit in 2010. $76.2 billion of it came from securities the Fed bought during the financial crisis. The bank sent $78.4 billion of that profit to the U.S. Treasury.
The Financial Times explains that the Fed sends most of its profit to the Treasury instead of recapitalizing itself. And there's always the possibility these profits won't hold up in the future:
It is possible that the Fed’s profits could turn to losses in future years if rising inflation forced it to tighten monetary policy rapidly. In that case, it would have to pay much more interest on its liabilities and might suffer capital losses if it had to sell securities rather than let them mature.
But a Fed official said that he could not see circumstances in which the Treasury would have to recapitalise the Fed. If a regional Fed bank did suffer losses, then it would be allowed to halt future payments to the Treasury until it had recovered them, and it could create an accounting asset to reflect the suspension of payments that would keep its capital positive.
The Federal Reserve Board on Monday announced preliminary unaudited results indicating that the Reserve Banks provided for payments of approximately $78.4 billion of their estimated 2010 net income of $80.9 billion to the U.S. Treasury. This represents a $31.0 billion increase in payments to the U.S. Treasury over 2009 ($47.4 billion of $53.4 billion of net income). The increase was due primarily to increased interest income earned on securities holdings during 2010.
Under the Board's policy, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed to the U.S. Treasury.
The Federal Reserve Banks' 2010 net income was derived primarily from $76.2 billion in income on securities acquired through open market operations (federal agency and government-sponsored enterprise (GSE) mortgage-backed securities, U.S. Treasury securities, and GSE debt securities); $7.1 billion in net income from consolidated limited liability companies (LLCs), which were created in response to the financial crisis; $2.1 billion in interest income from credit extended to American International Group, Inc.; $1.3 billion of dividends on preferred interests in AIA Aurora LLC and ALICO Holdings LLC; and $0.8 billion in interest income on loans extended under the Term Asset-Backed Securities Loan Facility (TALF) and loans to depository institutions. Additional earnings were derived primarily from revenue of $0.6 billion from the provision of priced services to depository institutions. The Reserve Banks had interest expense of $2.7 billion on depository institutions' reserve balances and term deposits.
Operating expenses of the Reserve Banks, net of amounts reimbursed by the U.S. Treasury and other entities for services the Reserve Banks provided as fiscal agents, totaled $4.3 billion in 2010. The Reserve Banks' operating expenses included assessments of $1.0 billion for Board expenditures and the cost of new currency. In 2010, statutory dividends totaled $1.6 billion and approximately $0.6 billion of net income was used to equate surplus to paid-in capital.
The preliminary unaudited results include valuation adjustments as of September 30 for TALF loans and consolidated LLCs. The final results, which will be presented in the Reserve Banks' annual audited financial statements and the Board of Governors' Annual Report, will reflect valuation adjustments as of December 31.
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