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Banks: The backbone of the commercial paper market
- Article from:
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Regional Economist
- Article date:
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January 1, 1996
- Author:
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Copyright informationCopyright Federal Reserve Bank of St. Louis Jan 1996. Provided by ProQuest LLC. (Hide copyright information)
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The commercial paper market offers a good example of banks' ability to facilitate the direct issue of securities and, in the process, help solve adverse selection problems.(1)
Commercial paper is an unsecured, short-term promissory note generally issued by large, well-known firms to fund current transactions, as opposed to long-term investment projects. For such firms, obtaining financing with commercial paper is often cheaper than bank loans. As a result, the level of outstanding commercial paper has risen sharply: Between 1980 and 1994, outstanding commercial paper climbed from $124.4 billion to $595.4 billion--an 11.8 percent annual growth rate (see chart).
Although commercial paper is a ...