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.
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.
CP is used by a range of corporate borrowers. GE Capital, a unit of General Electric, is one of the bigger CP borrowers, with a facility of about $46 billion in size, according to a recent filing. Toyota Motor Credit is another big user, with about $19 billion in CP, filings show. HSBC Finance, a unit of the large British bank, has a CP facility a little less than $4 billion in size, according to filings. And Google recently opened a new, $900 million CP facility—a program the Silicon Valley giant says could grow to as much as $3 billion over time.
A spokesman for GE Capital said the company has good access to liquidity as well as plans in place to adapt to changes to the commercial-paper market. A Toyota spokesman said it was too early to gauge the impact of Basel III on its CP program.
An HSBC spokesman said the Finance unit's use of CP had declined dramatically in recent years, and that the company would adjust its funding plans in the future "as needed." Spokespeople for Google had no immediate comment.
*This post was updated on September 16.
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