Good morning, resident jellyfish back again! Folks seemed to appreciate the last recap and I have been seeing a few threads from folks trying to wrap their head around on what is transpiring with Credit Suisse and the Swiss National Bank over the past day or so:
The Swiss National Bank (SNB) yesterday stated it would provide liquidity to Credit Suisse if needed.
This morning Credit Suisse announces they are borrowing from the Swiss National Bank:
Which the community immediately picked up on:
Say hello to Central Bank Liquidity Swaps!
In April 2009, the Federal Reserve announced foreign-currency liquidity swap lines with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.
The Federal Reserve lines constitute a part of a network of bilateral swap lines among the six central banks, which allow for the provision of liquidity in each jurisdiction in any of the six currencies should central banks judge that market conditions warrant. In October 2013, the Federal Reserve and these central banks announced that their liquidity swap arrangements would be converted to standing arrangements that will remain in place until further notice.
How it works:
In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.
When the foreign central bank loans the dollars it obtains by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank's account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.
The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve's balance sheet. Because the swap is unwound at the same exchange rate that is used in the initial draw, the dollar value of the asset is not affected by changes in the market exchange rate. The dollar funds deposited in the accounts that foreign central banks maintains at the Federal Reserve Bank of New York are a Federal Reserve liability.
SNB has used it 6 times for 7-day swaps totaling $20.5 billion
Lastly, back in September, the Swiss National Bank (SNB) used the long-standing swap line with the Fed for five 7-day swaps in a row. The largest swap amounted to $11.1 billion matured on October 27. Then again once more for a 7-day swap in December (matured on December 15th for $1,000,000).
Since December, there have been no further swaps with the SNB, and the balance with the SNB has been $0.
The SNB likely swapped $20.5 billion to provide short-term liquidity in September to Credit Suisse, right?!?!?!
These swaps would help its balance sheet (as they would be stored as assets), while it is fighting:
Remember, the Fed is playing slight of hand here.
Storing losses (-39.774 billion as of 3/8/2023) on the balance sheet as an asset like what is happening above, rather than showing the loss on the income statement right away, is an old corporate accounting trick.
The Fed explains this in footnote:
The 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 each Federal Reserve Bank's allotted surplus cap. Positive amounts represent the estimated weekly remittances due to U.S. Treasury. Negative amounts 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.
In other words, each week going forward, the linked chart will show the Fed’s total losses starting from September 2022. The bigger the negative number, the bigger the accumulated loss.
So, 'wut mean'? This number will get bigger to indicate the amount of money the Fed owes the treasury-- -$39,774 million and counting. The Fed gets to just sit on this negative balance and when it starts making money for treasury again (from money it makes on interest and fees, lowering its operating expenses, paying less on dividends), will see that negative number start to shrink (in theory).
REMEMBER: These losses do not matter to the Fed. The Fed creates its own money, and cannot become insolvent.
However, losses in the six months since September now total More than half of all the earnings the Fed remitted over the entire year of 2022 (-$39.77billions vs. $76.0 billion all of 2022):
During 2022, Reserve Banks transferred $76.0 billion from weekly earnings to the U.S. Treasury, and, in September 2022, most Reserve Banks suspended weekly remittances to the Treasury and started accumulating a deferred asset, which totaled $18.8 billion by the end of the year.
Again, a deferred asset has no implications for the Federal Reserve's conduct of monetary policy or its ability to meet its financial obligations.
However, what this will mean for Treasury I am not sure--with the current debt ceiling nonsense seeing Yellen taking extraordinary measures to keep everything afloat through June. You can bet they wish the Fed was sending those weekly earnings while having to navigate this environment.