This is a simplified depiction of the fiat banking system. Here, we will focus on the US system. Note how each liability of an entity corresponds to an asset of another entity and vice versa.
Components of the US Banking System ENTITIES LIABILITIES ASSETS EXAMPLES Individuals Mortgages, Loans, Taxes Deposits, Banknotes, Treasuries, Stocks, Bonds, MBS, Fund Shares, Benefit Payments High Net-Worth Individuals, Retail Investors, Family Offices, Other Individuals Businesses and Non-Profits Loans, Bonds, Stocks, Commercial Paper, Taxes Deposits, Banknotes, Subsidies Walmart, Caterpillar, American Red Cross, Powell’s Sweet Shoppe Financial Institutions Deposits, Fund Shares, MBS, Taxes Mortgages, Loans, Treasuries, Stocks, Bonds, MBS, Commercial Paper, Reserves, Deposits, Banknotes, Bailouts Bank of America, Vanguard, Fidelity Investments, Fannie Mae MBS Trusts, CalPERS Foreign Sector Deposits, Stocks, Bonds, Loans, Taxes Treasuries, Stocks, Bonds, Loans, MBS, Fund Shares, Deposits, Banknotes Bank of Japan, Norway Government Pension Fund Global, Foreign Corporations and Individuals Public Authorities and Government Trust Funds Bonds, Benefit Payments Treasuries Social Security Trust Fund, Medicare Hospital Insurance Trust Fund, Tennessee Valley Authority, Port Authority of New York and New Jersey Federal Reserve Banknotes, Reserves Treasuries, MBS Federal Reserve Bank of New York, Federal Reserve Bank of Chicago, Federal Reserve Bank of San Francisco US Federal Government Treasuries, Subsidies, Bailouts Taxes — Notes Flow Items Interests are implied: loans include interest, deposits include interest, and so on. Similarly, obligations like pension obligations and insurance obligations are implied alongside fund shares. Taxes include seizures, tariffs, etc. Bailouts, subsidies, taxes are flows, not balance sheet items (as are interests and other obligations mentioned above). Regardless, I’ve chosen to include them to maintain a sense of who is liable to pay these to whom. These flow items have been italicized. Perhaps the more appropriate terms would be tax liability, taxing authority, benefits entitlement, benefits obligations, etc. Although, strictly speaking, these are not balance sheet items. Financial Institutions include Commercial Banks, Credit Unions, Money Market Funds, Mutual Funds, Pension Funds, Exchange Traded Funds, Insurance Companies. Mortgage Backed Securities (MBS) are formed by pooling and securitizing Mortgages through MBS Trusts. Agency MBS Trusts are formed by government-backed institutions like Freddie Mac and Fannie Mae. Private Trusts or Special-Purpose Vehicles are MBS Trusts formed by large private financial institutions like Goldman Sachs and Merrill Lynch. Private Label MBS are much less common than Agency MBS. Treasuries and Agency MBS account for over 95% of the Federal Reserve’s assets. Foreign Sector This includes Foreign Central Banks, Commercial Banks, Sovereign Wealth Funds, Governments, Corporations, Households. The liabilities are • Foreign Stocks, Bonds, Loans held by US entities, • US entities’ deposits in Foreign Banks, and • Taxes owed by Foreign entities to the US Government. The assets are • US Treasuries, Stocks, Bonds, MBS held by foreigners, • foreign entities’ deposits in US Banks, • (not included in this table) taxes/obligations owed by US entities to foreign governments/entities. Financial assets are featured above. These are items that are someone else’s liabilities. Thus, items like gold, equipment, real estate, infrastructure (in the case of Public Authorities) which do not have corresponding liabilities are not listed here. Arguably, inflation should be included as well. An asset for the government, liability for anyone holding the currency. See also Components of the Indian Banking System.