Wells Fargo lays out a plausible scenario where the Fed becomes insolvent — and breaks down the catastrophic effect that would have on the bank's ability to handle future crises
solvency risk is not something that investors worry about a lot, if they do at all.
Since March, the Fed has added a significant amount of higher-risk assets to its balance sheet. These include corporate bonds, municipal bonds, and loans to small business through the Main Street Lending Program. These all have default risk — and according to the Fed, the size of holdings could grow from $200 billion currently to as much as $2.3 trillion if necessary.
"Although the technical insolvency of the nation's central bank may not have tremendous economic consequences, falling into a negative net worth situation could have significant political implications for the Federal Reserve," Bryson said. To be sure, more than half of the Fed's $7 trillion balance sheet is made up of assets with zero credit risk. The $4.3 trillion in Treasuries is backed by the full faith and credit of the US government, and as such does not face the prospect of default. The fact that investors are still buying Treasuries with near-recordEven other large components of the balance sheet carry strong immunity.
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