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What is a Central Bank's Balance Sheet?

A central bank’s balance sheet summarizes its financial position, and is made up of assets, liabilities and equity. Assets equal liabilities plus equity. In contrast to a corporation, currency in circulation (cash) is a liability for a central bank. Through the purchase of any asset, financial or not, a central bank may increase its balance sheet at no cost, simply by creating new money (increasing its currency in circulation liability by the exact amount it increases its assets).

The U.S. central bank is the Federal Reserve (Fed). Typically, the Fed’s largest liability is currency in circulation; its largest assets are often Treasury debt instruments. Presently, this relationship does not hold: mortgage-backed securities make up the largest portion of assets.