Commercial paper was one of the early casualties when the financial crisis struck. The short-term debt was widely issued by big banks and corporations to cover short-term obligations, but its use has been dwindling ever since. Asset-backed commercial paper in particular, which was sometimes based on a big vat of stinking assets but still rated AAA, now has a very tainted reputation. Kate Kelly at CNBC reports that the commercial paper market has shrunk from $2.2 trillion in August 2007 to just $1 trillion currently. But the news gets worse. The new Basel III capital rules will make it even less attractive to banks:
Under a Basel III provision known as the "liquidity coverage ratio," banks must use more conservative assumptions about the funds they could lose during periods of stress.
In addition, they'll have to hold safer instruments, like Treasury bills, as collateral, rather than relying on slightly riskier instruments like bonds backed by Fannie Mae and Freddie Mac. Traders and bank officials say those requirements will make it more onerous for them to prove CP and other cheap forms of funding.
Read the full story (and watch the associated clip) at CNBC.
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