Source: Federal Reserve Statistical Bulletin, Table H15, April 9, 2010.
258
Part 5 Financial Markets
later in this chapter) to obtain funds in the money market to meet short-term reserve
requirement shortages. The government funds a large portion of the U.S. debt with
Treasury bills. Finance companies like GMAC (General Motors Acceptance Company)
may enter the money market to raise the funds that it uses to make car loans.
2
Why do corporations and the U.S. government sometimes need to get their hands
on funds quickly? The primary reason is that cash inflows and outflows are rarely syn-
chronized. Government tax revenues, for example, usually come only at certain times
of the year, but expenses are incurred all year long. The government can borrow
short-term funds that it will pay back when it receives tax revenues. Businesses
also face problems caused by revenues and expenses occurring at different times.
The money markets provide an efficient, low-cost way of solving these problems.
Who Participates in the Money Markets?
An obvious way to discuss the players in the money market would be to list those who
borrow and those who lend. The problem with this approach is that most money mar-
ket participants operate on both sides of the market. For example, any large bank will
borrow aggressively in the money market by selling large commercial CDs. At the same
time, it will lend short-term funds to businesses through its commercial lending depart-
ments. Nevertheless, we can identify the primary money market players—the U.S.
Treasury, the Federal Reserve System, commercial banks, businesses, investments and
securities firms, and individuals—and discuss their roles (summarized in Table 11.2).
U.S. Treasury Department
The U.S. Treasury Department is unique because it is always a demander of money
market funds and never a supplier. The U.S. Treasury is the largest of all money
market borrowers worldwide. It issues Treasury bills (often called T-bills) and other
securities that are popular with other money market participants. Short-term issues
enable the government to raise funds until tax revenues are received. The Treasury
also issues T-bills to replace maturing issues.
Federal Reserve System
The Federal Reserve is the Treasury’s agent for the distribution of all government
securities. The Fed holds vast quantities of Treasury securities that it sells if it
believes the money supply should be reduced. Similarly, the Fed will purchase
Treasury securities if it believes the money supply should be expanded. The Fed’s
responsibility for the money supply makes it the single most influential participant in
the U.S. money market. The Federal Reserve’s role in controlling the economy
through open market operations was discussed in detail in Chapters 9 and 10.
Commercial Banks
Commercial banks hold a percentage of U.S. government securities second only to pen-
sion funds. This is partly because of regulations that limit the investment opportunities
available to banks. Specifically, banks are prohibited from owning risky securities, such
2
GMAC was once a wholly owned subsidiary of General Motors that provided financing options
exclusively for GM car buyers. In December 2008 it became an independent bank holding company.
Chapter 11 The Money Markets
259
as stocks or corporate bonds. There are no restrictions against holding Treasury secu-
rities because of their low risk and high liquidity.
Banks are also the major issuer of negotiable certificates of deposit (CDs),
banker’s acceptances, federal funds, and repurchase agreements (we will discuss
these securities in the next section). In addition to using money market
securities to help manage their own liquidity, many banks trade on behalf of
their customers.
Not all commercial banks deal in the secondary money market for their cus-
tomers. The ones that do are among the largest in the country and are often referred
to as money center banks. The biggest money center banks include Citigroup, Bank
of America, J.P. Morgan, and Wells Fargo.
Businesses
Many businesses buy and sell securities in the money markets. Such activity is
usually limited to major corporations because of the large dollar amounts
involved. As discussed earlier, the money markets are used extensively by
businesses both to warehouse surplus funds and to raise short-term funds. We
will discuss the specific money market securities that businesses issue later in
this chapter.
TA B L E 1 1 . 2
Money Market Participants
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