Federal Reserve Regional Banks Post Losses Near $100B!

By the Curmudgeon

Introduction:

Has anyone noticed? The Fed’s 12 regional banks, which used to make tons of money for the U.S. Treasury Dept., are now running big collective deficits. That’s because they’re paying more than 5% on trillions of dollars that they’ve borrowed from money-market mutual funds and other financial institutions, while their own portfolios remain loaded with low-yielding mortgage and Treasury securities which they bought during the days of near-zero interest (i.e., Fed’s ZIRP).

“Deferred Assets” - a Euphemism for Losses:

The 12 Federal Reserve Banks remit residual net earnings to the U.S. Treasury after providing for the costs of operations, payment of dividends, and the amount necessary to maintain their allotted surplus cap. Positive amounts represent the estimated weekly remittances due to U.S. Treasury. That occurred mostly from December 2008-to-March 2022 when ZIRP was in effect.

However, The Fed banks’ combined profit remittances to the Treasury through June 30^th were a meager $102 million, down more than 98% from the $62.8 billion remitted through June 30^th of 2022, before the Fed’s rate hikes began to seriously affect the financial markets and the Fed banks’ profits.

Negative remittances represent the cumulative deferred asset position, which is incurred during a period when earnings are not sufficient to provide for the cost of operations, payment of dividends, and maintaining surplus. The deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the U.S. Treasury resume.

As of August 30^th, “deferred assets” (i.e. losses) at the 12 Federal Reserve banks totaled $-95.121 billion, according to the Fed’s recent "Statement of Condition of Each Federal Reserve Bank" report.

Stephen Church of Piscataqua Research in Portsmouth, N.H. says the Fed banks’ losses have been running at about $2 billion a week, totaled $77.1 billion for the year as of late August, and the trailing loss was $94.5 billion. He expects the losses to hit $100 billion in September, which is a stone’s throw from the current $95.121 billion in losses noted above.

The Fed regional banks’ losses don’t increase federal budget deficits. But the now-vanished big profits that they used to send the Treasury did help hold down the deficit, which is $1.6 trillion so far, this fiscal year despite positive GDP.

Fed Balance Sheet Value of Securities Owned is NOT marked to market!

As we discussed in a recent Curmudgeon post, the Fed’s balance sheet has been declining and is now ~ $8.1 trillion.

As we can see from the table below, over $1.5 trillion worth of the U.S. Treasuries owned by the Fed have a maturity of over 10 years.

However, that is face value rather than mark-to-market. If the Treasuries and mortgage securities the Fed owns were marked to market, Fed losses would likely approach $1 trillion. That would dwarf the $100 billion of losses from the 12 regional Fed banks, which will get larger as interest rates stay “higher for longer.”

Maturity Distribution of Securities, Loans, and Selected Other Assets and Liabilities, August 30, 2023

Millions of dollars

Remaining Maturity	Within 15 days	16 days to 90 days	91 days to 1 year	Over 1 year to 5 years	Over 5 years to 10 years	Over 10 years	All
Loans^1	136,593	3,160	105,123	5,688	0	...	250,565
U.S. Treasury securities^2
Holdings	65,077	255,130	634,521	1,719,220	832,030	1,500,862	5,006,839
Weekly changes	-    3,067	+    3,498	-      410	+      150	+       79	+       94	+      345
Federal agency debt securities^3
Holdings	0	0	0	0	2,347	0	2,347
Weekly changes	0	0	0	0	0	0	0
Mortgage-backed securities^4
Holdings	0	0	11	9,087	42,759	2,447,012	2,498,870
Weekly changes	0	-        1	-        2	-      175	-      935	-   13,158	-   14,270
Loan participations held by MS
Facilities LLC (Main Street Lending
Program)^5	0	0	0	9,930	...	...	9,930
Municipal notes held by Municipal
Liquidity Facility LLC^6	0	0	2,907	0	...	...	2,907
Loans held by TALF II LLC^7	0	193	201	0	...	...	393
Repurchase agreements^8	1	0	...	...	...	...	1
Central bank liquidity swaps^9	232	0	0	0	0	0	232
Reverse repurchase agreements^8	1,998,323	0	...	...	...	...	1,998,323
Term deposits	0	0	0	...	...	...	0

Note: Components may not sum to totals because of rounding.
...Not applicable.

1.	Loans include primary, secondary, and seasonal loans and credit extended through the Paycheck Protection Program Liquidity Facility (PPPLF), Bank Term Funding Program, and other credit extensions. A component of PPPLF loans presented in the Within 15-day category has reached maturity and is recognized as performing loans based upon the underlying guarantee of the collateral by the Small Business Administration. Additionally, the Within 15 days category includes outstanding loans to depository institutions (including FDIC-established depository institutions) that were subsequently placed in receivership.  These loans are recognized as performing based upon payment due from the receiverships, pledged collateral securing the loans, and the FDIC repayment guarantees. Loans exclude the loans from the Federal Reserve Bank of New York (FRBNY) to Municipal Liquidity Facility LLC and TALF II LLC, and from the Federal Reserve Bank of Boston (FRBB) to MS Facilities LLC, which were eliminated when preparing the FRBNY's and FRBB's statement of condition, respectively, consistent with consolidation under generally accepted accounting principles.
2.	Face value. For inflation-indexed securities, includes the original face value and compensation that adjusts for the effect of inflation on the original face value of such securities.
3.	Face value.
4.	Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The current face value shown is the remaining principal balance of the securities.
5.	Book value of the loan participations held by the MS Facilities LLC.
6.	Book value of the municipal notes held by the Municipal Liquidity Facility LLC.
7.	Book value of the loans held by the TALF II LLC.
8.	Cash value of agreements.
9.	Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank.

Conclusions:

While the Fed’s interest rate increases have been great for savers, money market fund and CD investors, they have been terrible for the Fed’s regional banks.

Federal Reserve Banks are said to be set up like private corporations. Fed member banks hold stock in the Federal Reserve Banks and earn a 6% dividend per year.

However, their losses are not reported like those of private companies, and it appears those losses have no ill effect on the Fed’s operations or monetary policy.

Cartoon of the Week:

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Be well, success, good luck and till next time………………

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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