【文章內(nèi)容簡介】 ember bank of the Federal Reserve System, or “the Fed,” is required to maintain a minimum balance in a reserve account with the Fed. The required balance depends on the total deposits of the bank39。s customers. Funds in the bank39。s reserve account are calledfederal funds,Funds in a bank39。s reserve account.orfed funds.At any time, some banks have more funds than required at the Fed. Other banks, primarily big banks in New York and other financial centers, tend to have a shortage of federal funds. In the federal funds market, banks with excess funds lend to those with a shortage. These loans, which are usually overnight transactions, are arranged at a rate of interest called the federal funds rate.Although the fed funds market arose primarily as a way for banks to transfer balances to meet reserve requirements, today the market has evolved to the point that many large banks use federal funds in a straightforward way as one ponent of their total sources of funding. Therefore, the fed funds rate is simply the rate of interest on very shortterm loans among financial institutions. While most investors cannot participate in this market, the fed funds rate mands great interest as a key barometer of monetary policy.Brokers39。 CallsIndividuals who buy stocks on margin borrow part of the funds to pay for the stocks from their broker. The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests it. The rate paid on such loans is usually about 1% higher than the rate on shortterm Tbills.The LIBOR MarketTheLondon Interbank Offered Rate (LIBOR)Rate that most creditworthy banks charge one another for large loans of Eurodollars in the London market.is the rate at which large banks in London are willing to lend money among themselves. This rate, which is quoted on dollar denominated loans, has bee the premier shortterm interest rate quoted in the European money market, and it serves as a reference rate for a wide range of transactions. For example, a corporation might borrow at a floating rate equal to LIBOR plus 2%.LIBOR interest rates may be tied to currencies other than the . dollar. For example, LIBOR rates are widely quoted for transactions denominated in British pounds, yen, euros, and so on. There is also a similar rate called EURIBOR (European Interbank Offered Rate) at which banks in the euro zone are willing to lend euros among themselves.Yields on Money Market InstrumentsAlthough most money market securities are of low risk, they are not riskfree. The securities of the money market promise yields greater than those on defaultfree Tbills, at least in part because of greater relative riskiness. In addition, many investors require more liquidity。 thus they will accept lower yields on securities such as Tbills that can be quickly and cheaply sold for cash.Figure shows that bank CDs, for example, consistently have paid a premium over Tbills. Moreover, that premium increased with economic crises such as the energy price shocks associated with the two OPEC disturbances, the failure of Penn Square bank, the stock market crash in 1987, the collapse of Long Term Capital Management in 1998, and the credit crisis beginning with the breakdown of the market in subprime mortgages beginning in 2007. If you look back toFigure inChapter 1, you39。ll see that the TED spread, the difference between the LIBOR rate and Treasury bills, also peaked during periods of financial stress.p. 33WORDS FROM THE STREETMoney Market Funds and the Credit Crisis of 2008Money market funds are mutual funds that invest in the shortterm debt instruments that prise the money market. In 2008, these funds had investments totaling about $ trillion. They are required to hold only shortmaturity debt of the highest quality: the average maturity of their holdings must be maintained at less than 3 months. Their biggest investments tend to be in mercial paper, but they also hold sizable fractions of their portfolios in certificates of deposit, repurchase agreements, and Treasury securities. Because of this very conservative investment profile, money market funds typically experience extremely low price risk. Investors for their part usually acquire checkwriting privileges with their funds and often use them as a close substitute for a bank account. This is feasible because the funds almost always maintain share value at $ and pass along all investment earnings to their investors as interest.Until 2008, only one fund had “broken the buck,” that is, suffered losses large enough to force value per share below $1. But when Lehman Brothers filed for bankruptcy protection on September 15, 2008, several funds that had invested heavily in its mercial paper suffered large losses. The next day, the Reserve Primary Fund, the oldest money market fund, broke the buck when its value per share fell to only $.97.The realization that money market funds were at risk in the credit crisis led to a wave of investor redemptions similar to a run on a bank. Only three days after the Lehman bankruptcy, Putman39。s Prime Money Market Fund announced that it was liquidating due to heavy redemptions. Fearing further outflows, the . Treasury announced that it would make federal insurance available to money market funds willing to pay an insurance fee. This program would thus be similar to FDIC bank insurance. With the federal insurance in place, the outflows were quelled.However, the turmoil in Wall Street39。s money market funds had already spilled over into “Main Street.” Fearing further investor redemptions, money market funds had bee afraid to mit funds even over short periods, and their demand for mercial paper had effectively dried up. Firms that had been able to borrow at 2% interest rates in previous weeks now had to pay up to 8%, and the mercial paper market was on the edge of freezing up altogether. Firms throughout the economy had e to depend on those markets as a major source of short