The Treasury or ESF acquires foreign currency assets as a result of transactions such as intervention sales of dollars or sales of U.S. government currencies denominated in foreign currencies. When the Federal Reserve warehouses foreign currencies for the Treasury, Federal Reserve Bank assets denominated in foreign currencies increase as do Treasury deposits at the Fed. As these deposits are spent, reserves of U.S. banks rise. In contrast, the Treasury likely will have to increase the size of TT&L calls - a transaction that drains reserves - when it repurchases warehoused foreign currencies from the Federal Reserve. (In 1991, $2.5 billion of warehoused foreign currencies were repurchased.) The repurchase transaction is reflected on the Fed's balance sheet as declines in both Treasury deposits at the Federal Reserve and Federal Reserve Bank assets denominated in foreign currencies.

Transactions for Foreign Customers

Many foreign central banks and governments maintain deposits at the Federal Reserve to facilitate dollar-denominated transactions. These "foreign deposits" on the liability side of the Fed's balance sheet typically are held at minimal levels that vary little from week to week. For example, foreign deposits at the Federal Reserve averaged only $237 million in 1991, ranging from $178 million to $319 million on a weekly average basis. Changes in foreign deposits are small because foreign customers "manage" their Federal Reserve balances to desired levels daily by buying and selling U.S. government securities. The extent of these foreign customer "cash management" transactions is reflected, in part, by large and frequent changes in marketable U.S. government securities held in custody by the Federal Reserve for foreign customers. (See chart.) The net effect of foreign customers' cash management transactions usually is to leave U.S. bank reserves unchanged.

Managing foreign deposits through sales of securities

Foreign customers of the Federal Reserve make dollar-denominated payments, including those for intervention sales of dollars by foreign central banks, by drawing down their deposits at the Federal Reserve. As these funds are deposited in U.S. banks and cleared, reserves of U.S. banks rise. See illustration 38. However, if payments from their accounts at the Federal Reserve lower balances to below desired levels, foreign customers will replenish their Federal Reserve deposits by selling U.S. government securities. Acting as their agent, the Federal Reserve usually executes foreign customers' sell orders in the market. As buyers pay for the securities by drawing down deposits at U.S. banks, reserves of U.S. banks fall and offset the increase in reserves from the disbursement transactions. The net effect is to leave U.S. bank reserves unchanged when U.S. government securities of foreign customers are sold in the market. See illustrations 38 and 39.

Occasionally, however, the Federal Reserve executes foreign customers' sell orders with the System's account. When this is done, the rise in reserves from the foreign customers' disbursement of funds remains in place. See illustrations 38 and 40. The Federal Reserve might choose to execute sell orders with the System's account if an increase in reserves is desired for domestic policy reasons.

Managing foreign deposits through purchases of securities

Foreign customers of the Federal Reserve also receive a variety of dollar-denominated payments, including proceeds from intervention purchases of dollars by foreign central banks, that are drawn on U.S. banks. As these funds are credited to foreign deposits at the Federal Reserve, reserves of U.S. banks decline. But if receipts of dollar-denominated payments raise their deposits at the Federal Reserve to levels higher than desired, foreign customers will buy U.S. government securities. The net effect generally is to leave U.S. bank reserves unchanged when the U.S. government securities are purchased in the market.

Using the swap network

Occasionally, foreign central banks acquire dollar deposits by activating the "swap" network, which consists of reciprocal short-term credit arrangements between the Federal Reserve and certain foreign central banks. When a foreign central bank draws on its swap line at the Federal Reserve, it immediately obtains a dollar deposit at the Fed in exchange for foreign currencies and agrees to reverse the exchange sometime in the future. On the Federal Reserve's balance sheet, activation of the swap network is reflected as an increase in Federal Reserve Bank assets denominated in foreign currencies and in increase in the liability category "foreign deposits." When the swap like was repaid, both of these accounts decline. Reserves of U.S. banks will rise when the foreign central bank spends its dollar proceeds from the swap drawing. See illustration 41. In contrast, reserves of U.S. banks will fall as the foreign central bank rebuilds its deposits at the Federal Reserve in order to repay a swap drawing.

The accounting entries and impact on U.S. bank reserves are the same if the Federal Reserve uses the swap network to borrow and repay foreign currencies. However, the Federal Reserve has not activated the swap network in recent years.