Two years after the fall of Lehman Brothers shook the world’s markets, the once-popular commercial paper market remains a shadow of its former self.
The amount of outstanding commercial paper, a particularly cheap form of short-term funding, stands at $1 trillion today, according to Federal Reserve data—down from its $2.2 trillion peak in August of 2007.
Confidence in CP took a beating in September 2008, when Lehman’s bankruptcy forced bondholders to write their investments down to zero. Now, new guidelines mandated under the recently-unveiled Basel III rules may make CP even tougher for corporate borrowers to get, say traders and bank officials.
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.