Fed's "Other Assets" Hit All Time High Of $205 Billion

Tyler Durden's picture

Those looking for info on the Fed's now weely non-sterilized MBS purchases in the weekly H.4.1 update will be disappointed. The reason why the MBS line in the Fed's balance sheet will not move higher for a while is because, unlike TSYs, the settlement period for mortgage debt is usually many weeks and will months for all purchases already completed to appear in the "stock" total. One number, however, which may be of interest is the Fed's "Other Assets" because in the week ended October 10, this number hit an all time high of $205 billion and rising at an exponential phase.

Presenting Fed's Other Assets (2ry axis) together with total factors supplying reserves.

For those asking what "Other Assets" are, here is the official definition.

This item includes other Federal Reserve assets and non-float-related as-of adjustments. In addition to the as-of adjustments, there are many components in this category, including the following major items:

 

Assets denominated in foreign currencies: Foreign currencies are revalued to reflect movements in market exchange rates each day. If, in the revaluation, the value of the currency increases, then other Federal Reserve assets increase. On the other side of the balance sheet, "Other liabilities and capital" increase because the increase in value of the currency becomes earnings, which are reflected in the earnings category within the capital account. Other liabilities and capital decline in value as the earnings are removed from this category and the U.S. Treasury's general account increases because the funds are remitted to this account at the Reserve Banks.

 

Since 1963, the Federal Reserve has occasionally agreed to warehouse foreign currency for the Treasury. In such transactions, the Federal Reserve takes the foreign currency from the Treasury in return for dollars provided to the Treasury. The Federal Reserve makes a spot purchase of the currency and protects the value of those currencies purchased by simultaneously selling the same amount of currencies forward at the same price to the Treasury.

 

When the Federal Reserve warehouses foreign currencies for the Treasury, both "other Federal Reserve assets" and "U.S. Treasury, general account" increase in value at the time of the spot transaction. Both accounts decline when the forward transaction is completed or when currencies are withdrawn from the warehousing arrangement prior to maturity.

 

Premiums paid on securities bought: This release reports Federal Reserve holdings of securities at face value, not necessarily at market value. If the Federal Reserve pays more than the face value for securities it purchased, the premiums over the face value are amortized as the securities mature. Part of the premium is transferred daily to the earnings category as a "negative earning." As the premium in "Other Federal Reserve assets" is reduced, a simultaneous balancing reduction is made in "Other liabilities and capital." Securities purchased at a premium over face value are accounted for in this way because, at maturity, the Federal Reserve Banks receive only the face amount of the securities, not the amount actually paid.

 

The premiums paid on securities bought under repurchase agreements, though, are not amortized. These premiums are, in effect, returned to the Federal Reserve Banks when the securities are repurchased by the dealer, since the negotiated price in the original transaction reflects the premiums.

 

Accrued interest and other accounts receivable: This item represents the daily accumulation of interest earned on U.S. government securities--other than bills--owned by the Federal Reserve or held under repurchase agreements, on loans to depository institutions, and on foreign currency investments. Interest is accrued daily.

 

Reserve Bank premises and operating equipment less allowances for depreciation: This item states the value, at initial cost, of the land and buildings of the Reserve Banks and branches less an allowance for depreciation on buildings, including building-related machinery and equipment

No, it is not merely accrued interest as can be clearly seen here especially with the annual remittance of all accrued treasury interest. And yes, foreign currency transactions on behalf of the Treasury certainly do play a large role here. And of course, POMO.

Finally, let's not forget this from March:

As if the 'risk-less' dollar-swaps the Fed has extended to any and every major central bank were not enough, William Dudley just unashamedly admitted that the Fed now holds 'a very small amount of European Sovereign Debt'. Explaining this position, as Bloomberg notes:

  • *DUDLEY: FED HOLDS OVERSEAS SOVEREIGN DEBT TO MANAGE RESERVES
  • *DUDLEY: HIGH BAR FOR ADDITIONAL PURCHASES OF EUROPE DEBT

Dudley, testifying to a House panel, noted that he doesn't see more efforts by the Fed to buffer the US from Europe's tempests and believes European banks are deleveraging in an orderly manner. So not only is the US taxpayer bailing out Europe via the IMF (as we noted here a week ago using Greece as an intermediary) and the Fed is providing limitless USD swap lines but now we join the ECB in monetizing European government bonds - something we warned might happen back in December 2010. As for being a small amount - wasn't MF Global's holding relatively small too? And aren't we getting a little full from all this buying?

Since "Other Assets" is the only place these European bonds can be placed, one wonders: just how much is "small amount"?