The central bank's accounting of its balance sheet should mirror that of the banks it regulates.
Federal Reserve Board Chairman Ben Bernanke, during the Fed's first-ever news conference last week, spoke convincingly of the need for transparency at America's central bank.
"It used to be that the mystique of central banking was all about not letting anybody know what you were doing," Bernanke said. "I personally have always been a big believer in providing as much information as you can to help the public [and the markets, he added] understand what you're doing."
If this is the case, Bernanke needs to update the Federal Reserve System's accounting practices so they comply with other institutions. Consider the facts:
A month before Bernanke's press conference, in late March, the Fed made news by reporting record 2010 earnings for the system's 12 regional reserve banks. The Fed's $81.7 billion of earnings accounted for 5% of total United States corporate profits. The reserve banks' profits were almost as great as the $87.5 billion earned by all 7,657 FDIC-insured banks and thrift institutions. They exceeded the 2010 earnings of any other company in the world by over $30 billion.
Of the Fed's profit, $79.3 billion were remitted to the U.S. Treasury for "interest on Federal Reserve notes," reducing the federal deficit by about 5%. The reserve banks paid most of the rest of the profits (about $1.4 billion) as dividends to their member-bank shareholders, and less than $1 billion was added to the reserve banks' capital accounts.
Unfortunately, several caveats apply to the Fed's earnings reports because of the central bank's unique accounting protocols. Those protocols raise serious questions about the Fed's transparency and call into question the profit numbers that the central bank releases to the American public. According to Deloitte LLP, the Fed's external auditors, the Federal Reserve's Financial Accounting Manual employs methods "other than accounting principles generally accepted in the United States of America" (GAAP). Circumventing GAAP allows the Fed to do things that the banks it regulates cannot do under GAAP or normal banking laws and regulations.