In this chapter we have examined some of the most important money market institutions, including commercial banks, major corporations, and federal credit agencies. Among the key points were the following:

• Banks are among the most important financial institutions in the money market, providing credit to security dealers, industrial firms, and other money market participants. Banks are also the principal channel for making payments in the money market, acting as guarantors of payments and as custodians for the safekeeping of financial instruments. Finally, banks serve as a key channel for government economic policy, particularly in regulating the supply and cost of money and credit.



• Two of the most important domestic sources of funds in the money market that support the activities of banks are federal funds and negotiable CDs (certificates of deposit). Federal funds represent “immediately available” money in the form of large-denomination deposits that can be wired the same day from lenders to borrowers and then back again. Negotiable CDs are savings deposits with fixed or variable interest rates that are issued in denominations of $100,000 or more.



• Other important sources of money market funding for banks are Eurocurrency deposits, which consist of bank time deposits denominated in a currency other than the currency of the country where the bank accepting these deposits is located. Thus, a deposit of U.S. dollars in Great Britain is a Eurodollar deposit. They are not immediately spendable funds but constitute a reservoir of liquidity that can be used as a basis for expanding the volume of credit available within the international financial system.



• Among the most important sources of Eurocurrency deposits are tourist travel abroad, balance-of-payments deficits with other nations, and investments made overseas. Banks also use Eurocurrency deposits to help supply liquid reserves to support bank lending and investing activities.



• One of the best-known and oldest of bank-issued money market instruments is the bankers’ acceptance, which constitutes a time draft drawn against a bank. The accepting bank pledges payment upon a specific date in the future. Widely used for many years to fund exports and imports of goods in international markets, the volume of acceptances has recently been declining as other financial instruments have moved in to take over the same role. Moreover, information flows between countries are much more complete today, reducing some of the risk of foreign trade that acceptances were designed originally to deal with.



• Eurocurrency deposits, federal funds, and negotiable CDs, help banks meet the legal reserve requirements that the central bank (in the United States, the Federal Reserve System) imposes upon their deposit holdings. Bankers must continually compare the cost and availability of federal funds, CDs, Eurocurrency deposits, and other sources of bank funds in order to secure the reserves they require.



• Major corporations are active as both borrowers and lenders in the money market. One of the best known of their borrowing instruments is commercial paper. The commercial paper market has grown over the years as major industrial corporations and financial-service companies, facing growing demands for their products and services, have turned increasingly to the open market for capital. The commercial paper market has provided a relatively low cost, flexible vehicle for raising short-term cash.



• Commercial paper has offered several distinct advantages over other sources of corporate funds, including ready access to new funds, lower interest rates than on most other sources of capital, and leverage to use against other lenders of funds when seeking new financing. A borrowing company that can tap the paper market for funding can always threaten to go to that market if a lending institution refuses to make a loan on reasonable terms. However, the paper market also has some disadvantages, being highly volatile at times with a scarce supply of available credit.



• One of the most rapidly growing of all money market segments in recent years involves trading in the IOUs issued by federal agencies, such as the Federal National Mortgage Association or the Farm Credit System. These agencies were set up to provide credit or help develop a market for loans to disadvantaged sectors of the economy, such as farms and ranches, new home buyers, and small businesses.



• Federal and government-sponsored agencies act like financial intermediaries, borrowing and lending funds at the same time. They rely upon the government’s implied or expressed guarantee to give them an advantage in the competition for funds, lowering their cost of financing. With the government’s implicit or explicit backing, these agencies issue securities almost as attractive as U.S. Treasury securities to most investors, but with slightly higher yields than are available on direct government obligations.