Federal Reserve, Using Non-Compliant Accounting, Hides Over $100 Billion a Year of Losses and Resulting Negative Equity, Due to Illegal Bank Subsidies

William Bergman, who was an economist at the Chicago Fed for 14 years, has published a bombshell analysis for the Institute for New Economic Thinking, which describes in depth how the central bank has been hiding large losses and what should be shown as negative equity via its own irregular accounting. Bergman’s finding of a loss rate of $100 billion a year is based on the subsidy to banks provided by the payment of interest on reserves, whose costs has risen considerably due to comparatively high interest rates in recent years. We’ll later unpack a second unaccounted-for source of losses, which Bergman mentions but doe not attempt to estimate, which is unrecognized losses on securities purchased during QE, whose value has fallen in a higher interest rate environment. As we’ll explain, QE by design was a “buy high, sell low” scheme, so this outcome should not be surprising.

Due to the size of the full article, which includes the 2002 paper, we are embedding only the 2025 portion and the abstract of the 2002 paper. Bote are highly readable. We encourage you to read them in full (the entire article is here).

Bergman documents that the central bank has been hiding its negative equity status by engaging in accounting that is out of conformity with any form of reporting to which the Fed is required to adhere. These losses, now in excess $100 billion a year due to the Fed’s early implementation, in 2008, of paying interest on reserves banks keep with the Fed.

Adding to the weight of Bergman’s charges is a 2002 Bergman draft paper that the Fed suppressed and is included with the document published by INET. It documents how the Fed was already engaged in an impermissible subsidy, by not recovering its fully loaded costs for Fedwire providing, the essential interbank payment system, as required by statute. Even though the Fed’s own reports show Fedwire as paying its own way, repeated statement by Fed official contradict those figures. As Bergman pointed out:

If a 1980 law directs the Federal Reserve to charge prices for its payments services so as to achieve full cost recovery in the long run, why did members of the Federal Reserve Board of Governors testify in the late 1990s that guaranteed final settlement through Fedwire comprises a subsidy?

We have explained before the absolutely central role that Fedwire plays in the dollar payments system. When a bank makes a payment to another bank, the receiving bank treats it as money good because the Fed stands behind the transaction. That means banks run large intraday balances with Fedwire and are expected to settle up at the end of day. That entailed risk of a bank that was in a deficit position not being able to make good and imposing a loss on Fedwire.

The Fed in 2008 changed to a system of paying interest on reserves that banks keep with the Fed. That incentivized banks to keep large reserves, theoretically eliminating the payment risk issue (although that was not the reason for implementing this system²). The Fed attempted to justify this new subsidy to banks as a way to manage interest rates, when there was nothing wrong with the established system of having the New York Fed’s money market desk trade so as to keep market rates in line with the central bank’s policy rate. And in fact this new scheme performed poorly in rising interest rate cycle. The repo panic of 2017 was the direct result, as we pointed out repeatedly at the time, of the Fed having gotten out of the habit of managing rates via at times very active intervention by the New York Fed and stumbling about as it tried to use atrophied muscles.³

Bergman explains what resulted:

So, today, we have the Fed incurring massive losses driven by the Fed paying interest to banks for the privilege of reducing the risk they pose to the Fed, instead of charging banks to fully recover the cost of guaranteeing daylight-overdraft funded Fedwire payments. And the Fed is accumulating losses in a dubious asset that helps it keep from reporting a negative capital position on its balance sheet. Yet the Fed’s balance sheet has significant consequences for the federal government’s fiscal condition, and in turn, taxpayers. The Fed is effectively masking its true net position, keeping it from showing a negative number like the “zombie banks” that
Edward Kane identified. Ironically, the Fed is able to do so using accounting policies it drafts for itself while asserting the value of central bank “independence.”

The Fed asserts that its losses need not impair its ability to conduct monetary policy. If they are indeed irrelevant, however, why does the Fed choose to implement strange accounting policies that keep it from reporting red numbers in the net position for the Reserve Banks?

he article explains in detail how the Fed does not adhere to any of the arguably applicable accounting standards: FASB, GASB, or FASAB.

To turn to the QE matter, which only adds to this sorry picture: As Bernanke explained at the time, the objective of QE was to lower mortgage interest rates and spreads by buying Treasuries and other high quality securities, as in Federally guaranteed mortgage securities. The central bank never purchased subprime or less than pristine bonds (from a credit standpoint). The purpose was to lower mortgage rates, which are much longer in maturity than the short end, where the Fed normally operates. The goal was to goose the very sick housing market.

Success of this scheme would inherently produce interest rate losses on the instruments the Fed purchased. QE represented an artificially large level of demand destined to lower rates, as in bid up prices. Prices would be lower absent the Fed operation, hence the central bank was, by design, “buying high”.

So when the economy recovered, which a more robust housing market was expected to achieve, interest rates would increase from their abnormally low level during the crisis. That would produce interest rate losses on the securities the Fed bought during QE. The Fed has pretended they don’t exist by treating them as “hold to maturity”. But refusing to mark to market does not mean the losses do not exist.

Even though this bill of particulars would make a great Trump Administration bludgeon to use against the Fed, I doubt they will go there, save at most for criticizing Powell for making this sorry situation worse with continued high rates. First, talking about a >$100 billion annual subsidy to banks should lead to demands to unwind that, or alternatively, recover it via true full pricing for Fed services as mandated by Congress. It seems very unlikely that Team Trump will want to gore the oxen of powerful donors. Second, the issue is complex and Trump and complexity do not co-exist happily.

Below is Bergman’s short recap for INET if you don’t have time to dive into the full article. Hopefully it will whet your appetite to read the underlying piece.

By William (Bill) Bergman, who has four decades of financial market experience in private sector, public sector, and educational roles. He served as an economist and financial markets policy analyst for the Federal Reserve Bank of Chicago from 1990 to 2004. He delivers a daily newsletter on government finance at GovMoneyNews, and he is co-authoring a book (with Larry Feltes) to be titled “Three Keys: Unlocking Prosperity with Ethics, Economics and Excellence.” Originally published at the Institute for New Economic Thinking website

Without transparent accounting practices and proper risk management, the Federal Reserve’s current financial losses—unprecedented in scale—and the questionable accounting practices it uses to downplay their impact threaten public trust, economic stability, and the integrity of fiscal policy.< The Federal Reserve is experiencing something new in its history: sustained and sizable operating losses. These losses—currently running at more than $100 billion a year on an annualized basis—stem largely from the sharp rise in short-term interest rates, which has increased the interest the Fed pays on bank reserves while the income from its long-term securities portfolio remains comparatively low. At the same time, the Fed’s approach to accounting for these losses departs from the norms applied to other public and private institutions. Since 2010, the Fed has recorded them as a “deferred asset”—essentially the expectation of future earnings—rather than reducing its reported capital position. This treatment helps the Fed avoid reporting negative capital, but also makes it harder for the public to see the institution’s true financial condition. My new INET Working Paper connects these current developments to a longer history of accounting choices—particularly those related to the Fed’s Fedwire payment system—that have tended to understate the costs and risks the central bank assumes.

Fedwire and Daylight Overdrafts

Fedwire is the Federal Reserve’s wholesale payment system, moving trillions of dollars daily between banks. One of its defining features is that the Fed guarantees each payment to the receiving bank, even if the sending bank does not have sufficient funds in its account at the moment of transfer. This practice can create “daylight overdrafts”—short-term intraday credit extended by the Fed.

The 1980 Monetary Control Act required the Fed to price its payment services, including Fedwire, to recover all direct and indirect costs over the long run, including an imputed return on capital and the cost of credit provided. Yet for decades, the Fed has excluded important components from its cost-recovery calculations, such as the foregone interest on daylight overdrafts and expenses incurred in monitoring and managing payment system risk.

The result is an apparent contradiction. In testimony to Congress, Fed officials have acknowledged that Fedwire access and daylight overdrafts represent part of a “safety net” subsidy to banks. At the same time, the Fed’s cost-recovery reports assert that Fedwire has fully recovered its costs year after year. Both cannot be true in the same sense.

From Payment Services to Balance Sheet Losses

The link to today’s losses lies in how the Fed manages the risks and costs of its own activities. Since 2008, the Fed has paid interest on reserves, encouraging banks to hold large balances at the central bank. This has helped reduce daylight overdraft exposures—but it also means that the Fed now pays substantial interest to banks, particularly in a higher-rate environment.

With the level of reserves now above $3 trillion, the cost of these interest payments has risen sharply, contributing to today’s operating losses. Those losses are then absorbed into the “deferred asset” account, avoiding an immediate impact on reported capital. This approach resembles the way some banks accounted for securities on a “held-to-maturity” basis—a method that came under scrutiny during the 2023 banking turmoil.

Why It Matters

Central banks can, in principle, operate with negative capital without immediate operational disruption. But the way losses are measured and reported still matters for transparency, fiscal policy, and public trust. The Fed’s accounting choices for both its payment system and its broader balance sheet have tended to minimize reported costs and risks. Over time, this can obscure the real economic implications for the U.S. Treasury and, ultimately, taxpayers.

The experience with Fedwire offers a reminder that the details of cost measurement, risk assessment, and accounting policy are not mere technicalities. They shape perceptions of central bank performance, influence incentives in the financial system, and determine how the burdens and benefits of central bank activities are distributed.

If we want to understand the Fed’s current losses—and their implications—it helps to look at how the institution has long handled the costs of the services it provides. Fedwire’s history shows that the question is not just how much the Fed earns or loses in a given year, but how it defines and measures those outcomes in the first place.
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¹ Bergman had been invited to present it in Washington. He was told by a senior Chicago Fed officer, after I was “You can drop this and move on, or do this, and really move on.”

² From Bergman’s article:

A comprehensive piece of legislation, the Monetary Control Act was preceded by a lengthy deliberative process. During the 1970s, high and rising inflation and interest rates were coupled with a much-discussed Federal Reserve ‘membership problem,’ a problem identified as a source of difficulty in conducting monetary policy. Federal Reserve member banks were increasingly opting out of membership as the opportunity cost of maintaining non-interest bearing reserves rose along with market interest rates, even though payments services were offered to member banks for free.

In April 1978, G. William Miller, the Chairman of the Federal Reserve Board of Governors, testified to Congress that the Federal Reserve was considering the possibility of paying interest on reserves held at Federal Reserve banks as a means of addressing the membership problem. The legal foundation for an independent decision on this action was questioned by Congressional leadership. Comprehensive legislation was developed to address the membership issue by requiring universal yet simpler and less onerous reserve requirements, together with a direction that the Federal Reserve begin offering its payments services to all depository institutions on a priced basis. The Federal Reserve previously provided these services exclusively to member banks, and for free.

³ It did not help that the two most senior traders on the money market desk had resigned a few months before the repo panic. One has to wonder why.

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