I cite this Aug. 3 2020 august by Wells Fargo Research Team. Title is "Implications of Fed balance sheet growth". Please answer in simple English! I embolded the phrase in question.
That said, the Fed has created a number of programs since March that could alter the composition and credit risk of its balance sheet. For example, corporate bonds and state & municipal bonds, which the Federal Reserve is buying, have higher default risk than Treasury securities or MBS. Furthermore, the loans that the Fed is now buying from commercial banks through its Main Street Lending Program also have default risk. The amount of credit that the Federal Reserve has extended to these facilities totals about $200 billion at present, but they could grow to a maximum of $2.3 trillion, in aggregate. All of these facilities are capitalized by $215 billion from the U.S. Treasury Department, which would have any first-loss exposure. However, this equity infusion from the Treasury Department as well as the $39 billion worth of capital that the Fed holds could be completely depleted if the credit losses incurred by these facilities exceed $254 billion.5
Of course the Federal Reserve is not an ordinary commercial bank. Congress could pass legislation requiring commercial banks, which are the Fed's primary equity contributors, to re-capitalize the Fed, or the federal government could also stake a significant new equity stake in the central bank. 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.
Thus far, many observers have lauded the Fed for the actions it has taken to stem the ongoing economic crisis, but these actions have also taken it into uncharted territory. Suffering significant credit losses on some these new programs could lead some in Congress to question whether the Fed's crisis mitigation efforts go beyond its mandate. New legislation or more stringent congressional oversight could weigh on the Fed's independence and its ability to respond to new problems as they arise. The Federal Reserve may face some criticism even in the absence of any solvency issues, as it did following the 2008 financial crisis. However, entering into technical insolvency, should that eventuality transpire, could lead to a political backlash that could potentially have implications for the Federal Reserve to respond to future crises.
