How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities

Deborah Leonard, Antoine Martin, Simon Potter, and Brett Rose



In our previous post, we considered balance sheet mechanics related to the Federal Reserve’s purchase and redemption of Treasury securities. These mechanics are fairly straightforward and help to illustrate the basic relationships among actors in the financial system. Here, we turn to transactions involving agency mortgage-backed securities (MBS), which are somewhat more complicated. We focus particularly on what happens when households pay down their mortgages, either through regular monthly amortizations or a large payment covering some or all of the outstanding balance, as might occur with a refinancing.

How the Fed Changes the Size of Its Balance Sheet

Deborah Leonard, Antoine Martin, and Simon Potter



The size of the Federal Reserve’s balance sheet increased greatly between 2009 and 2014 owing to large-scale asset purchases. The balance sheet has stayed at a high level since then through the ongoing reinvestment of principal repayments on securities that the Fed holds. When the Federal Open Market Committee (FOMC) decides to reduce the size of the Fed’s balance sheet, it is expected to do so by gradually reducing the pace of reinvestments, as outlined in the June 2017 addendum to the FOMC’s Policy Normalization Principles and Plans. How do asset purchases increase the size of the Fed’s balance sheet? And how would reducing reinvestments reduce the size of the balance sheet? In this post, we answer these questions by describing the mechanics of the Fed’s balance sheet. In our next post, we will describe the balance sheet mechanics with respect to agency mortgage-backed securities (MBS).

The Role of Central Bank Lending Facilities in Monetary Policy

Helene Lee and Asani Sarkar

Editor’s note: This post was originally published on June 30, 2017. We are running it again today, August 14, in conjunction with a companion piece scheduled for August 16. An error in the table was corrected on July 3.



Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve’s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed’s discount window is less integrated into the monetary policy framework. In a follow-up post, we will discuss differences in the central banks’ counterparty and collateral policies.

The Turnaround in Private and Public Financial Outflows from China

Thomas Klitgaard and Harry Wheeler



China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank’s purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in. This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving surplus at prevailing exchange rates. Explanations for this turnaround by private investors include lower returns on domestic investment spending and a less optimistic outlook for China’s currency.

How Do Central Bank Balance Sheets Change in Times of Crisis?

Emily Eisner, Antoine Martin, and Ylva Søvik



The 2007-09 financial crisis, and the monetary policy response to it, have greatly increased the size of central bank balance sheets around the world. These changes were not always well understood and some were controversial. We discuss these crisis-induced changes, following yesterday’s post on the composition of central bank balance sheets in normal times, and explain the policy intentions behind some of them.

What Is the Composition of Central Bank Balance Sheets in Normal Times?

Emily Eisner,  Antoine Martin, and Ylva Søvik



There has been unusually high activity on central banks’ balance sheets in recent years. This activity, which has expanded beyond the core operations and collateral of the central bank, has been called “unconventional,” “nonstandard,” “nontraditional,” and “active.” But what constitutes a normal central bank balance sheet? How does central bank asset and liability composition vary across countries and how did the crisis change this composition? In this post, we focus on the main characteristics of central bank balance sheets before the crisis. In our next piece, we describe how this composition has changed in response to the crisis.

Crisis Chronicles: Central Bank Crisis Management during Wall Street’s First Crash (1792)

James Narron and David Skeie

As we observed in our last post on the Continental Currency Crisis, the finances of the United States remained chaotic through the 1780s as the young government moved to establish its credit. U.S. Congress was finally given the power of taxation in 1787 and, in 1789, Alexander Hamilton was appointed as the first Secretary of the Treasury. Hamilton moved quickly to begin paying off war debts and to establish a national bank—the Bank of the United States. But in 1791, a burst of financial speculation in subscription rights to shares in the new bank caused a tangential rally and fall in public debt securities prices. In this edition of Crisis Chronicles, we describe how Hamilton invented central bank crisis management techniques eight decades before Walter Bagehot described them in Lombard Street.

Historical Echoes: A Central Bank by Any Other Name Is Still . . .

Amy Farber

Perhaps you enjoy being read to out loud. Perhaps you enjoy being read to on subjects related to central banking. Perhaps you would enjoy being read the Wikipedia entries for central banks around the world. If so, and your reader was to read the following beginning sentences for central bank entries, you would hear:

The central bank of Trinidad and Tobago is the central bank of Trinidad and Tobago . . . . The central bank of Yemen is the central bank of Yemen . . . . The central bank of The Bahamas is the central bank of The Bahamas . . . . The central bank of Jordan is the central bank of Jordan . . .

Historical Echoes: Central Bank and Paper Money Innovator Given Death Sentence for His Efforts

Amy Farber

In 1668, Johan Palmstruch, the head of Stockholm Banco, the precursor to the oldest central bank still operating today—the Swedish Riksbank—was charged and sentenced to death, according to Wikipedia and the Riksbank.

Just Released: Chairman Bernanke Returns to His Academic Roots

Argia M. Sbordone

Federal Reserve Chairman Ben Bernanke is back in the classroom this month to deliver a series of four lectures for undergraduate students at the George Washington School of Business in Washington, D.C. It’s a welcome reconnection with students for Chairman Bernanke, who joined the Federal Reserve System in 2002 after a long career as an economics professor at Stanford University and later at Princeton University. The lectures at the George Washington School are part of Bernanke’s ongoing effort to educate the public about the role played by the Federal Reserve during the recent financial crisis. The nature and the scope of these lectures allow the Chairman to draw upon his background as a scholar of the Great Depression and his experience at the helm of the U.S. central bank to put the financial crisis in a broader context. The Chairman will talk about the origins and mission of central banks, identify the lessons learned from previous financial crises, and describe how those lessons informed the Fed's decisions during the recent crisis.