The Swiss National Bank vs. the Federal Reserve: The Fed's Capital Losses in Perspective

Published in The Mises Institute’s Mises Wire.

Switzerland’s central bank, the Swiss National Bank (SNB), lost $3.6 billion in 2023,1  after a gigantic loss of $150 billion in 2022. But after booking these losses, and properly subtracting them from its capital, the SNB still had positive capital of over $70 billion. This gives it the quite respectable capital to total assets ratio of 7.9%. All of these numbers are after marking its investments to market, as is required by the SNB’s governing law, so the capital is a real, marked to market equity. The market value of the SNB’s holdings of gold is $65 billion, which includes a large appreciation, including $1.9 billion in 2023. Since the SNB had an overall loss for the year, it paid no dividends to its stockholders.

“The SNB aims for a robust balance sheet with sufficient equity capital to ensure that it can also absorb high losses,” it states.2  This sound financial principle is the opposite of the official position of the Fed. 

The Federal Reserve, central bank not only to the United States but to the dollar-using world, had a gigantic loss of $114 billion for 2023. It had reported a profit for the full year 2022, but had started losing money in September of that year at the remarkable rate of $2 billion a week. The Fed’s huge losses are continuing into 2024—by its February 28, 2024 report the aggregate losses have reached $154 billion. Since the Fed’s governing law does not permit it to maintain “a robust balance sheet with sufficient equity capital to absorb high losses,” indeed forbids it from doing so, the losses have wiped out the Fed’s capital by more than 3.5 times. 

Of course, the Congresses which passed the Federal Reserve Act and its amendments never intended the Fed to run with negative capital—they simply thought it was impossible for the Fed to lose this much money-- a flawed assumption.

The current capital deficit is shown by the undeniable arithmetic of the Fed’s capital as of February 28. The Fed has paid-in capital of $36 billion and miniscule retained earnings of $7 billion, for total of $43 billion. Starting capital of $43 billion minus Losses of $154 billion = current capital of negative $111 billion.

You will not find this negative capital, which is the real capital, reported on the Federal Reserve balance sheet, however. The Fed insists on the accounting charade of booking its massive losses as an asset, a so-called “deferred asset.” Do you believe, Candid Reader, that losses are an asset? You don’t? Neither do I. Do you believe that losses should be subtracted from capital, as responsibly done by the SNB? So do I! In short, the Fed publishes, not to put too fine a point on it, a phony capital number. But that’s its line, and the Fed is sticking to it.

Unlike the SNB, the Fed owns zero gold to help offset the secular depreciation of all paper currencies.

In spite of its huge losses, negative capital and negative retained earnings, the Fed continues to pay dividends to its shareholders. And the Fed does not mark its investments or its capital to market.

Taken all together, this makes quite an interesting contrast with the SNB. 

The Federal Reserve balance sheet combines the balance sheets of the twelve regional Federal Reserve Banks (FRBs). Here is an update on the real capital as of February 28, 2024 of these individual FRBs, as well as the total Federal Reserve. Eight of the twelve FRBs are technically insolvent, with losses of more than 100% of their capital and thus liabilities greater than their assets. Two other FRBs have lost 98% and 85% of their capital and are steadily approaching technical insolvency. Only two have most of their capital left. Of all the FRBs, the biggest and most important by far is the FRB of New York. It also has far and away the biggest losses and the most negative capital. The total system has a huge capital deficit. Recall that the table shows the real capital numbers, not the contrived ones reported by the Fed.

Real Capital of the Federal Reserve Banks as of February 28, 20243 :

Federal Reserve Bank Real Capital Losses as a % of Starting Capital

New York ($82.4 bln) 655%

Richmond ($15.6 “ ) 284%

Chicago ($ 8.8 “ )  515%

San Francisco ($ 2.8 “ ) 151%

Cleveland ($ 1.5 “ ) 134%

Boston ($ 1.2 “ ) 165%

Dallas ($677 mln) 161%

Kansas City ($ 94 “ ) 120%

Philadelphia $ 31 “ 98%

Minneapolis $ 40 “ 85%

St. Louis $891 “ 8%

Atlanta. $ 1.3 bln 13%

Federal Reserve System ($111 bln) 357%

These capital numbers do not include, unlike the SNB, any mark to market results. The Fed does disclose, quarterly, although not put into its financial statements, the mark to market losses on its portfolio. As of September 30, 2023, the net mark to market loss was the pretty amazing amount of $1.3 trillion. A reasonable guess at the end of February 2024 is that market value loss was about $1 trillion. Thus the mark to market capital would be negative $111 billion plus negative $1 trillion = negative $1.1 trillion.

Do you like your central bank capital positive or negative? I believe that the Fed should be recapitalized, but the Fed itself and most economists fervently dispute this. At the very least, Congress should insist, as would be required by the Federal Reserve Loss Transparency Act,4  a bill introduced by Congressman French Hill, that the Fed keep honest books.