Question

Draw a balance sheet for the Federal Reserve. Explain how each item fits under liabilities and assets for the Federal Reserve and how that is different from commercial banks.

Answer 1

Fed assets include: (as shown in the figure)

• securities, chiefly as Treasuries;
• foreign exchange reserves, that are chiefly held as foreign bonds that are issued by the international governments;
• loans given to the commercial banks.

Fed liabilities include:

• currency, that is held by the populace,
• federal government's bank a/c, which the fed utilizes like anyone would utilize their own checking a/c, depositing its revenues, chiefly taxation revenues, into it’s a/c, & paying its bills, chiefly in an electronic format;
• commercial bank a/c, called reserves, where commercial banks maintain their deposits with the Federal bank. Vault cash- is the cash retained in the banks' vaults, is also portion of the commercial banks' reserves, as it is utilized to service its clients

Like any other bank, the fed’s balance sheet is constituted of assets & liabilities. The assets are identical to those of commercial banks & incorporate governmental securities. The fed’s liabilities, however, differ essentially from those of commercial banks. Its most vital liabilities are in circulation currency & reserves. Common banks own their deposits in the central bank (reserves), hence they treat them as assets. The central bank owes these funds to common banks, so it must treat them as liabilities.