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Are central banks on the way to bankruptcy?

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The bond market had a bad year. And nobody owns more bonds than central banks, which have amassed a fixed income portfolio of more than $30 trillion over the past decade. But do their increasing losses really matter?

Yes and no. Central banks are clearly unique institutions. On the one hand, they have a balance sheet and P&L like everyone else, and now they don’t look great.

Toby Nagle appreciates Bank of England losses Alone is currently around £200 billion, and Federal Reserve It says it made $330 billion in unrealized losses by the end of the first quarter. We think it’s safe to say that the pain has increased since then.

On the other hand, central banks are builders of sovereign nations and they can literally create money out of thin air, making the whole issue of bankruptcy take on a different dimension.

Morgan Stanley Chief Economist Seth Carpenter wrote one of the… final papers about it while at the Federal Reserve a decade ago, and revisited the topic over the weekend. Given the timeliness we thought we’d share and rephrase freely.

Central bank profits and losses are important. . . But only when it matters. Before the twentieth century, the subject of economics was called “political economy”. Central bank losses affecting financial results may have political repercussions, but the ability of banks to implement policy is not affected. . .

. . . Beginning with the Federal Reserve, all revenue generated in the system’s open market account portfolio, interest expense shorting, realized losses, and operating costs are transferred to the US Treasury. Before the global financial crisis, these transfers averaged $20-25 billion per year. It swelled to over $100 billion as the balance sheet grew. These transfers reduce deficits and borrowing needs. Net income is based on coupon average (mostly fixed) on assets, share of interest-free liabilities (actual fiat currency), level of reserves and reverse repurchase balances, the costs of which are affected by the policy rate. From essentially zero in 2007, interest-bearing liabilities have spread to nearly two-thirds of the balance sheet.

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As the chart below shows, the US central bank’s net income (which has been transferred back to the US Treasury) has turned negative, and Morgan Stanley expects losses to rise as interest rates rise.

Carpenter points out that most central banks, including the Fed, do not tag the market, so any Unrealized losses It does not flow into the central bank’s income statement until it actually sells the assets. But this obviously raises a lot of interesting questions.

So, what do losses mean? Is there a capital strike? bankruptcy? Inability to manage monetary policy? no. First, the transfers end to the treasury, and the treasury issues more debt. The Fed then accumulates its losses and, instead of reducing its capital, creates a “deferred asset.” 1 when profits become positive again, transfers remain at zero until losses are compensated; Imagine that the Fed faces a 100% tax rate and compensates for current losses with future income. Profitability will eventually return because the currency will continue to grow, interest expenditures will be reduced, and QT will reduce interest-bearing liabilities.

Things are similar elsewhere, but with domestic volatility, such as the Czech central bank’s long-standing negative equity, or the fact that the Bank of England received outright compensation from the British government to offset any losses when it began passing QE dividends.

The effect is essentially the same with the Federal Reserve, but the political economy is different. Where HMT and the Bank of England share responsibility, the Fed is on its own. The Bank of England’s passive unwinding is tricky, given the clumplike maturity structure of gilded holdings, while the Fed has up to $95 billion per month passively running out. For the Bank of England, a one percentage point increase in the bank exchange rate reduces remittances by about £10 billion a year, a substantial amount for a country grappling with financial issues. The proposal to cut expenditures by prohibiting interest payments on reserves deserves scrutiny. If there is no power left, the Bank of England will have to sell assets to regain monetary control, and make losses. The losses are there. It is the timing that is questionable.

The ECB’s balance sheet is structured quite differently, but the logic is similar. Our European team expects the deposit rate to be 2.5% by next March, which means that the European Central Bank will lose about 40 billion euros next year. Bank deposits receive a deposit rate, which will be much higher than the return on the wallet. The Bank of Japan’s balance sheet is similarly inflated, but as of March (the most recent data available), the Bank of Japan was in an unrealized gain position. We believe that the yield curve control (YCC) will be maintained until the end of Governor Kuroda’s term, but when it ends, if the JGB curve is sold off sharply, the losses may be significant, albeit not realized.

The most interesting alternative is the Czech National Bank. The National Central Bank has had a negative attitude to equity for most of the past twenty years. Running a small open economy means focusing on the exchange rate, and most assets are denominated in foreign currencies. If the central bank is credible and the CZK rises, then the value of its assets falls. The same is true of the Swiss National Bank, whose profits and losses have swung into the billions in some years, but has not lost control of politics.

negative equity of the central bank; Coming to the Fed, Bank of England or European Central Bank near you soon?

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New York Federal Reserve Securities Link Reverse Repo to Bank Regulatory Change by Reuters

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© Reuters. FILE PHOTO: The Federal Reserve building is seen in front of the Federal Reserve Board and is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, US, January 26, 2022. REUTERS/Joshua Roberts

Written by Michael S Derby

(Reuters) – Continued massive cash flows at a key Fed facility are largely driven by a change in bank liquidity regulations from last year, a New York Federal Reserve report said on Friday.

The Fed offers what’s called a reverse repo, which allows eligible businesses to store cash at the central bank for a risk-free return. The rule that plays into the inflows is a regulation called the supplementary leverage ratio, which determines how much liquidity banks need on hand.

The SLR standard was relaxed during the most severe phase of the coronavirus pandemic in 2020, when concerns about market performance prevailed, and it was restored at the end of March 2021, to return to a more stringent level.

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Banking economists Jara Afonso, Marco Cipriani, and Gabriel La Spada write: “After the end of the SLR exemption period, banks had less flexibility to expand their balance sheets by increasing their holdings of reserves and Treasuries.” This had a knock-on effect on money market funds, the main users of reverse repo, which drove liquidity into the reverse repo facility.

After the regulations changed, the newspaper said, banks were less inclined to take deposits, and instead the money flowed into financial funds, which had to invest that money somewhere. Meanwhile, banks have cut back on short-term debt offerings, restricting where money can be invested. Moreover, the federal interest rate increases pushed cash into money market funds as financial markets experienced a shift in the cost of short-term borrowing, according to the authors.

The Federal Reserve’s esteemed buyback facility is an essential part of the toolkit it uses to manage its federal funds rate target setting, which it uses to influence the economy’s trajectory to achieve its inflation and employment targets. A reverse repo tool provides money market funds and other companies a place to deposit cash into the Federal Reserve overnight and earn a return. It is currently at 3.8% and is an investment with a better return than many private securities that come with greater risks.

The Fed’s reverse repo facility was largely unused in the spring of 2021, and then flows increased steadily. Inflows peaked at $2.426 trillion at the end of September before easing slightly to Friday’s inflow of $2.05 trillion.

Fed officials were optimistic about the huge levels of inflows. Some have argued that as the Fed raises interest rates and reduces the size of its balance sheet to combat high inflation, inflows into the reverse repo facility should decrease over time. But so far it hasn’t really happened.

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Meanwhile, issues related to the correct setup of the SLR are under consideration by the financial authorities, who are treading cautiously on the issue. “History shows the massive costs incurred by society when bank capital is inadequate, and therefore the urgency that the Fed properly adjusts capital regulation,” Michael Barr, the Fed’s official on bank supervision, said in comments Thursday.

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US Federal Reserve proposes plan for banks to manage climate-related financial risks By Reuters

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© Reuters. FILE PHOTO: An eagle graces the facade of the US Federal Reserve Building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

Written by Chris Prentice

WASHINGTON (Reuters) – The U.S. Federal Reserve on Friday joined other major bank regulators in proposing a plan for how big banks can manage climate-related financial risks, drawing immediate opposition from one member and reservations from another.

The proposed principles detail the expectations for banks with more than $100 billion in assets to incorporate climate-related financial risks into their strategic planning. The proposal was approved for public comment in a 6-1 vote of the Fed’s Board of Governors.

The proposal marks the latest effort by US policymakers to prepare for potential financial risks from climate change, bringing the Fed into line with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which have separately proposed their own plans.

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The potential impacts of climate change — rising sea levels, worsening floods and fires, and government policies moving away from carbon-heavy industries — could destroy trillions of dollars in assets worldwide.

The Fed said these financial implications “constitute an emerging risk to the integrity and integrity of financial institutions and to the financial stability of the United States.”

The Fed’s plan requires banks to consider climate-related financial risks in their audits, manage other risks, and add climate-related scenario analysis to the traditional stress test. The report suggested that banks should also assess and consider whether they should include climate-related risks in their liquidity reserves.

The debate over the extent of financial system risks posed by climate change has been politically charged. Federal Reserve Governor Christopher Waller opposed Friday’s proposal, raising the question of whether it represented a serious risk to the safety of large banks or financial stability in the United States.

“Climate change is real, but I do not agree with the premise that it poses a serious risk to the safety and integrity of major banks and the financial stability of the United States,” Waller said in a statement released alongside the proposal. “The Fed conducts regular stress tests on large banks that deliver very severe macroeconomic shocks and show that banks are resilient.”

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Gov. Michele Bowman endorsed the plan for public input with reservations, noting that the board should consider the “costs and benefits of any new projections.”

The proposal will be open to public comment for 60 days.

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More than 1,000 New York Times union employees plan to quit over payroll, reports Reuters

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© Reuters. FILE PHOTO: The New York Times Building in Manhattan, New York, US, August 3, 2020. REUTERS/Shannon Stapleton/File Photo

(Reuters) – More than 1,000 unionized employees of The New York Times Company have pledged to quit if the news publisher does not agree to a “full and fair contract” by Dec. 8, according to a union tweet on Friday.

The New York Times NewsGuild sought “inflationary” wages as well as preserving and enhancing health insurance and retirement benefits promised during employment, according to a letter signed by 1,036 members.

“We will be out and about for 24 hours, Thursday, December 8th, if we do not have a full and fair contract agreement in place by then,” the letter said.

Union members are also asking for flexibility to work remotely, among other demands.

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A spokesperson for The New York Times said “While we are disappointed that NewsGuild is threatening to strike, we stand ready to ensure The Times continues to serve our readers without interruption,” adding that the company’s current pay offer offered “significant increases.”

Earlier in March, a group of nearly 600 tech employees at The New York Times voted to unionize as the company faced allegations that it illegally interfered with organizing work.

In August, approximately 300 Thomson Reuters (NYSE: Corp) journalists in the US, represented by the same NewsGuild, also staged a 24-hour strike while the union negotiated a new three-year contract with the company.

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