The Treasury’s Supplemetary Financing Account
December 9, 2008 · Posted in Monetary Economics
The Federal Reserve Bank has recently been bailed out by the U.S. Treasury:
A new item has been introduced on its balance sheet: The Supplementary Financing Account:
September 17, 2008
Treasury Announces Supplementary Financing Program
Washington- The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.
The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.
Announcements of and participation in auctions conducted under the Supplementary Financing Program will be governed by existing Treasury auction rules. Treasury will provide as much advance notification as possible regarding the timing, size, and maturity of any bills auctioned for Supplementary Financing Program purposes.
Under this program, the Treasury creates new bills and sells them on the open market. The money obtained in these sales is maintained at an account at the Federal Reserve. The Federal Reserve uses this money in order to purchase assets from troubled banks.
It was first introduced in the release from September 25th 2008 with an amount of $117 billion. It is now at $440 billion as per the December 4th release, approximately 20% of the Fed’s balance sheet.
On November 17th the Treasury annonuced:
November 17, 2008
Treasury Issues Debt Management Guidance on the Temporary Supplementary Financing Program
Washington - The balance in the Treasury’s Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government’s financing needs.
It is true, since mid November the account has been dropping steadily from its peak at $550 billion.
It is curious, however, that this measure was introduced at precisely the time when reserve balances at the Federal Reserve began to spiral out of control (September 18 2008):
Since then the total reserves at the Federal Reserve have risen by 6300% (!!) from about $10 billion to about $630 billion over the course of 3 months.
Certainly this supplementary financing program has fulfilled some kind of purpose in this process. I am not yet 100% clear on what it was, but I am working on it.