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12 11 2015 | by Victor Xing | Central Banks

Where do central banks get their funding?

Central banks do not need external funding (self-funded).  They often provide services for domestic and foreign banking institutions as well as government agencies.  For example, the Federal Reserve provides the following services:
Naturally, these services are not free of charge, and the Federal Reserve generate income from performing these services.  They also illustrate the central bank’s essential role in the functioning of the U.S. and global financial systems.
But that is only a small fraction of the Federal Reserve’s income.  The Federal Reserve currently holds $4.2 trillions of Treasury securities, MBS, and agency debentures on its vast balance sheet.  These bonds generate interest, and below is the magnitute of interest income over the first three quarters of 2015 (source: quarterly balance sheet developments report):
  • The average daily balance of the Federal Reserve SOMA holdings was approximately $4.2 trillion during the first three quarters of 2015.
  • Net earnings from the portfolio were approximately $84.0 billion; most of the earnings were attributable to interest income on Treasury securities and federal agency and GSE MBS.
  • Total net income for the Maiden Lane LLC was $30.0 million during the first three quarters of 2015.
  • After providing for the payment of dividends and reserving an amount necessary to equate surplus with capital paid in, the Reserve Banks remitted $73.6 billion to the Treasury during the first three quarters of 2015
The $84 billion net earning far exceeded the Federal Reserve’s operating expenses, and per Congressional mandate, the Federal Reserve remitted $73.6 billion back to the U.S. Treasury.  The following graph shows the scale of the the System Open Market Account (SOMA) Holdings vs. interest income for the first three quarters of 2015, as well as 2014 net income vs. remittances to the Treasury (the difference was kept as Federal Reserve’s operating income)
In conclusion, central banks holding large balance sheets such as the Federal Reserve,European Central Bank, Bank of England, 日本銀行 Bank of Japan, do not need external funding.  The QE assets held on bank balance sheets (these assets, however, were purchased using electronic cash created by the central banks themselves) would be sufficient to cover their operating expenses.
Central bank funding - SOMA interest payments and service fees
Original Quora article

Next article12 11 2015 | by Victor Xing | Capital Markets

How do investment funds manage liquidity risk?