Debt, Deregulation and Financial Crises
Chapter 3: Commercial paper guarantees and the emergence of a parallel banking system
The expansion of US banks’ involvement in off-balance sheet contingency lending began in the aftermath of the collapse of the commercial paper (CP) market in 1970 when banks charged fees for contracts to lend to CP issuers in the event of another crisis. Their support for the major issuers (finance companies) led to the emergence of an unregulated parallel banking system funded by the primary buyers of their paper (money market mutual funds) that reduced banks’ share of lending to households and businesses and encouraged banks to expand into more sophisticated forms of guarantees such as derivatives. These contingency lending contracts and derivatives positions became known as shadow banking and had already greatly expanded off-balance sheet positions at the large banks in the 1980s.
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