Remittance and Reserve Banks profits.

[Xerxes]

An obscure but interesting topic, yet one thing is unclear. 
 

it defines profitability as creating new money to buy investments, which exceeds banks operating cost. operating cost to me is the cost of running operation. It makes no mention of the yield it has to pay to commercial banks. 
 

in the same article close to the end, it explains its lack of profitability in recent years being due to having lower interest return on its portfolio and thus a low spread against how much it is paying out to commercial banks (5%)
 

 

[wabuffo]

lol - the right arm of the Federal govt (US Treasury) pays interest to the left arm of the Federal govt (Federal Reserve) who then pays it back to the right arm of the Federal govt.   But sure - "profits".

 

Bill

[lnofeisone]

2 hours ago, Xerxes said:

An obscure but interesting topic, yet one thing is unclear. 
 

it defines profitability as creating new money to buy investments, which exceeds banks operating cost. operating cost to me is the cost of running operation. It makes no mention of the yield it has to pay to commercial banks. 
 

in the same article close to the end, it explains its lack of profitability in recent years being due to having lower interest return on its portfolio and thus a low spread against how much it is paying out to commercial banks (5%)
 

 

The article seems to have internal inconsistencies. If fed banks can make money from thin air, they should just make some money and buy more assets with higher rates to offset what they have to pay banks. Fed banks aren't going to have run on the bank so they are sitting on MTM losses but who cares? I also don't understand what the author is trying to convey or what conclusions we should be drawing other than "Here is some cool insight into the plumbing of the financial system." 

[Xerxes]

1 hour ago, lnofeisone said:

The article seems to have internal inconsistencies. If fed banks can make money from thin air, they should just make some money and buy more assets with higher rates to offset what they have to pay banks. Fed banks aren't going to have run on the bank so they are sitting on MTM losses but who cares? I also don't understand what the author is trying to convey or what conclusions we should be drawing other than "Here is some cool insight into the plumbing of the financial system." 

I think what promoted the author to write the article was “accumulated deficit” that had to be backfilled before more $ goes to treasury …. So a pittance of remittance for time being … think that is the “news” part. So the story was structured around that. 

 

the mechanics of it is interesting though even if is missing cohesiveness, I.e rates were higher recently not lower, etc  

[Xerxes]

1 hour ago, wabuffo said:

lol - the right arm of the Federal govt (US Treasury) pays interest to the left arm of the Federal govt (Federal Reserve) who then pays it back to the right arm of the Federal govt.   But sure - "profits".

 

Bill

the “sovereign” point of view ?  

[Cigarbutt]

From a certain perspective,

the change in trend appears significant.

However, in the grand scheme of things, on a relative basis, the remittances are not that significant:

and they are the ultimate referee for capital rules, including for themselves.

-----

Still if you are an investor, in the typical sense, into such entity, the operating income and dividend capacity have decreased due to the asset-liability mismatch. The Belgian central bank (as a satellite-like branch from the ECB) can be owned by private investors and, from that specific point of view, the value, as derived from the 'market', has declined. Too much?

 

[Xerxes]

On 10/3/2024 at 8:04 PM, Cigarbutt said:

From a certain perspective,

the change in trend appears significant.

However, in the grand scheme of things, on a relative basis, the remittances are not that significant:

and they are the ultimate referee for capital rules, including for themselves.

-----

Still if you are an investor, in the typical sense, into such entity, the operating income and dividend capacity have decreased due to the asset-liability mismatch. The Belgian central bank (as a satellite-like branch from the ECB) can be owned by private investors and, from that specific point of view, the value, as derived from the 'market', has declined. Too much?

 

I suppose it is hard to justify to “own” a central bank whose primary mission is probably not aligned with its shareholders all the time. I think Swiss central bank was also “investable”. 
 

In the same vein, Aramco which has I think 2% of its shares publicly traded, may have great cost advantages and dividend but if one buys those shares, one is investing in Saudi foreign policy and national interest. Nothing is wrong with that, if that is what one wishes, but just to say that it is not purely based on shareholder interest and maximizing value, even if 98% of ownership is with the Government. 

[wabuffo]

I suppose it is hard to justify to “own” a central bank whose primary mission is probably not aligned with its shareholders all the time.

 

Who owns the "equity" of the Federal Reserve?

 

Bill

[lnofeisone]

5 minutes ago, wabuffo said:

I suppose it is hard to justify to “own” a central bank whose primary mission is probably not aligned with its shareholders all the time.

 

Who owns the "equity" of the Federal Reserve?

 

Bill

This is why this article is so inconsistent. Say member banks own the "equity" in their district Federal Reserve, and yes, they have to provide 6% (3 in reality) of their stock + surplus, but that's independent of the Federal Reserve's balance sheet and income. Losses or steep income declines have no impact on Federal Reserve shareholders. This is a long way of saying that I still don't understand the purpose of this article other than informational, "Look how cool this is!"

[wabuffo]

This is a long way of saying that I still don't understand the purpose of this article other than informational, "Look how cool this is!"

 

Its clickbait for the uninformed.  

 

BTW - as an aside, in 2019, a Federal Appeals Court ruled that member banks do not own equity in their respective district Reserve Bank.  (See Wells Fargo vs United States, US Court of Appeals for the Second Circuit).   The US Treasury owns 100% of the equity.   Its a legacy of the Federal Reserve's creation in order to get banks to move from private payment clearing houses to the Fed's payment system - but now a pure relic.   

 

Bill

[Xerxes]

1 hour ago, wabuffo said:

I suppose it is hard to justify to “own” a central bank whose primary mission is probably not aligned with its shareholders all the time.

 

Who owns the "equity" of the Federal Reserve?

 

Bill

I was going to say the same as Infoeisone. As in owned by private banks in the form of non-tradable stock. 

[lnofeisone]

13 hours ago, wabuffo said:

This is a long way of saying that I still don't understand the purpose of this article other than informational, "Look how cool this is!"

 

Its clickbait for the uninformed.  

 

BTW - as an aside, in 2019, a Federal Appeals Court ruled that member banks do not own equity in their respective district Reserve Bank.  (See Wells Fargo vs United States, US Court of Appeals for the Second Circuit).   The US Treasury owns 100% of the equity.   Its a legacy of the Federal Reserve's creation in order to get banks to move from private payment clearing houses to the Fed's payment system - but now a pure relic.   

 

Bill

Interesting. I haven't heard this interpretation of this case. I always thought of the Bank || Federal Reserve relationship as similar to how I am a shareholder in Greenbay Packers. Great certificate, but absolutely no say in that team's operations. 

[wabuffo]

I haven't heard this interpretation of this case.

 

Note that FRB = Federal Reserve Banks in this case.  Here it is in clear language.   Basically, the member banks' capital contributions are debt, and not, equity.

 

Bill

 

[wabuffo]

Here's the portion where the Second Circuit classifies member banks' capital as debt.  I forgot to include it in the previous post.

 

Bill

 

 

[lnofeisone]

Super clear and helpful. I'll re-read this case this weekend. Been a hot minute since I looked at it.