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*Figures after 1970 are for large banks only.

Sources: Federal Reserve Flow of Funds Accounts; Federal Reserve Bulletin; Banking and Monetary Statistics, 1945-1970; Annual Statistical Digest, 1971-1975; Economic Report of the President. www.federalreserve.gov/releases/z1

*Figures after 1970 are for large banks only.

Sources: Federal Reserve Flow of Funds Accounts; Federal Reserve Bulletin; Banking and Monetary Statistics, 1945-1970; Annual Statistical Digest, 1971-1975; Economic Report of the President. www.federalreserve.gov/releases/z1

are an extremely important source of funds for commercial banks, from corporations, money market mutual funds, charitable institutions, and government agencies.

Commercial Paper. Commercial paper is a short-term debt instrument issued by large banks and well-known corporations, such as General Motors and AT&T. Before the 1960s, corporations usually borrowed their short-term funds from banks, but since then they have come to rely more heavily on selling commercial paper to other financial intermediaries and corporations for their immediate borrowing needs; in other words, they engage in direct finance. Growth of the commercial paper market has been substantial: The amount of commercial paper outstanding has increased by over 3,900% (from $33 billion to $1.3 trillion) in the period 1970-2002. We discuss why the commercial paper market has had such tremendous growth in Chapter 10.

Banker's Acceptances. These money market instruments are created in the course of carrying out international trade and have been in use for hundreds of years. A banker's acceptance is a bank draft (a promise of payment similar to a check) issued by a firm, payable at some future date, and guaranteed for a fee by the bank that stamps it "accepted." The firm issuing the instrument is required to deposit the required funds into its account to cover the draft. If the firm fails to do so, the bank's guarantee means that it is obligated to make good on the draft. The advantage to the firm is that the draft is more likely to be accepted when purchasing goods abroad, because the foreign exporter knows that even if the company purchasing the goods goes bankrupt, the bank draft will still be paid off. These "accepted" drafts are often resold in a secondary market at a discount and are therefore similar in function to Treasury bills. Typically, they are held by many of the same parties that hold Treasury bills, and the amount outstanding has experienced limited growth, rising by 28% ($7 billion to $9 billion) from 1970 to 2002.

Following the Financial News /

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