Easy Loans

The Board of Governors of the Federal Reserve announced the the Reserve Banks transferred approximately $76.9 billion of their estimated 2011 net income to the U.S. Treasury. This is slightly less than the $79.3 billion distribution to Treasury for 2010.

The Reserve Banks had an estimated unaudited net income of $78.9 billion for 2011. The Reserve Banks reported reported revenues of $83.6 billion in interest income on securities acquired through open market operations. Additional earnings were derived primarily from realized gains on the sale of U.S. Treasury securities of $2.3 billion, foreign currency gains of $152 million, and income from services of $479 million.

The Reserve Banks had interest expense of $3.8 billion on depository institutions reserve balances and term deposits.

Operating expenses of the Reserve Banks totaled $3.4 billion in 2011. In addition, the Reserve Banks were assessed $1.1 billion for the cost of new currency and Board expenditures and $282 million to fund the operations of the Bureau of Consumer Financial Protection and Office of Financial Research.

Read the press release.

Banks participating in the Small Business Lending Fund (SBLF) increased loans to small businesses by $1.3 billion in the final quarter of 2011. These banks have now increased small business lending $4.8 billion over their baseline in 2011.


So far, 235 of the 281 participating community banks (84%) have increased their small business lending. Moreover, a substantial majority, over 68%, have increased small business lending by more than 10%.

Read Treasurys report.

The Federal Reserve recently released an analysis of the impact of the conservatorship of GSEs on community banks. They found that approximately five hundred banks, or about one in fourteen of the country’s banks, held perred stock in Fannie Mae and Freddie Mac on their balance sheets entering into the 2008 financial crisis. The total exposure across banks and other depository institutions was at least $8 billion, and while a good portion of that was held by the largest institutions, community banks (banks with less than $10 billion assets) held at least $2.3 billion.

Many community banks found that the sharp, sudden drop in the GSEs’ perred stock prices resulted in capital shocks from which they could not recover. The failures of fifteen depository institutions (either directly or indirectly) can be traced to losses from GSE investments, and another two institutions were forced to sell themselves to other institutions in order to avoid failure.

For the banks with GSE exposure, the median drop in the ratio of Tier 1 capital to risk-weighted assets was about three percent and this translated into loan growth two percentage points below other banks on average.

The study also found that banks with GSE losses were 50 percent more likely to be downgraded to a weak regulatory rating than other banks.

Read the Federal Reserves full report.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are coordinating actions to enhance global liquidity so as "to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses."

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points.

In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary.

Read the Federal Reserve press release.

A recent article in the Financial Times noted that banks are increasing holdings of collateralized mortgage obligations (CMO’s), credit instruments that aggregate mortgages into pools. The article noted that banks were increasing holdings of “the sliced-and-diced debt that some blame for the financial crisis.” Later in the article the author noted that some of these instruments were backed by the U.S. government and “generally considered safe.”

A closer inspection of the data shows that all of the growth in CMO holdings comes from the safe, government backed CMO’s. Moreover, banks have been allowing holdings of privately issued CMO’s to run off.



In fact privately issued CMO’s have decreased by 54% from their peak at the end of 2007, and currently represent 1.2% of bank assets, down from 2.7%. During this same period banks grew their holdings of government backed CMO’s to 3.5% of assets, from 1.3% in 2007. It is this growth alone that led to a 21% growth in CMO holdings.

Interestingly, the growth cited in the article looks only at the government backed CMO holdings. By not including the runoff in privately issued CMO’s, it overstates the growth of the entire market. In fact, the overall CMO growth did increase from the end of 2007 to present by 21%; however looking simply at government backed CMO’s for the same period makes growth appear to be 175%.

*The article mentioned appeared in the Financial Times on February 8th under the title “US banks snap up bundled mortgage products”