Federal Reserve System: The Surplus Account

The Board of Governors of the Federal Reserve System (Federal Reserve Board) reviewed its policies regarding the size of the Federal Reserve Banks' combined capital surplus account to determine if opportunities exist to decrease the amount held in the account. The consolidated capital surplus account is the aggregate of separate surplus accounts held at each of the 12 Reserve Banks, and the account represents cumulative retained net earnings for the Reserve Banks--that is, cumulative net earnings not paid to the Department of the Treasury. The Reserve Banks use their capital surplus accounts to act as a cushion to absorb losses. The Financial Accounting Manual for Federal Reserve Banks says that the primary purpose of the surplus account is to provide capital to supplement paid-in capital for use in the event of loss. Selected major foreign central banks maintain accounts with functions similar to the Federal Reserve System's capital surplus account. Although their accounts are not fully comparable with the Federal Reserve System capital surplus account, the Bank of England, the Bundesbank, and the European Central Bank have capital surplus or reserve accounts in addition to their paid-in capital accounts that are used as cushions against loss. The Federal Reserve System calculates earnings and transfers excess earnings to the Treasury on a weekly basis. Although the Federal Reserve System has not had an annual operating loss since 1915, the Reserve Banks recorded some weekly losses between 1989 through 2001, thus temporarily reducing their capital surplus accounts to cover these weekly losses. Reducing the Federal Reserve System capital surplus account would create a one-time increase in federal receipts, but the transfer by itself would have no significant long-term effect on the budget or the economy. Amounts transferred to the Treasury from reducing the capital surplus account would be treated as a receipt under federal budget accounting but do not produce new resources for the federal government as a whole