One of the key measures taken by the Federal Reserve to support the broader economy in response to the financial crisis was the introduction or expansion of facilities designed to provide liquidity to the funding markets. The intention and impact of these facilities was to foster stable financial conditions and preserve the flow of credit in the economy. In addition to helping stabilize market conditions, this article asserts that the liquidity facilities generated an estimated profit of $13 billion.
In this article, authors Michael J. Fleming and Nicholas J. Klagge examine the effects of the liquidity facilities on the Federal Reserve’s interest and fee income between August 2007 and December 2009—the period of the facilities’ greatest usage. Their analysis concludes that the programs contributed an estimated
$20 billion to the Federal Reserve’s interest and fee income during that period, or $13 billion after taking into account the estimated
$7 billion cost of funds.
The authors also explain that while some of the extra income generated should be considered compensation for additional credit risk, the Federal Reserve took numerous facility-specific steps to keep credit risk to a minimum. Steps included establishing eligibility criteria for borrowers, providing the loans on a short-term basis and requiring that loans be backed by adequate collateral. According to the article, the Federal Reserve has not borne any credit losses to date through its new or expanded liquidity facilities.
Any excess income generated by the Federal Reserve, such as income derived from the liquidity facilities, is turned over to the Treasury, offsetting the government’s need to raise such funds from other sources. In 2009, for example, the Federal Reserve Banks transferred $47.4 billion of their $52.4 billion net income to the Treasury.
Michael J. Fleming is a vice president in the Research and Statistics Group of the Federal Reserve Bank of New York; Nicholas J. Klagge is a financial/economic analyst in the Bank’s Credit and Payments Risk Group.