<p>Things have changed- Basel III requires capital to be held against committed but undrawn lines of credit <a href="https://support.precisionlender.com/hc/en-us/articles/115009834408-Regulatory-Capital-Requirements-for-Line-of-Credit-Products" rel="nofollow noreferrer">https://support.precisionlender.com/hc/en-us/articles/115009834408-Regulatory-Capital-Requirements-for-Line-of-Credit-Products</a></p>

CC BY-SA 4.0
2022-08-30T04:12:46.573Z
2022-08-30T04:12:46.573Z
dm63
<p>Back when the Federal Reserve intervened in the commercial paper market in the 1970s, corporates essentially woke up the next morning and found they had two back-stopped modes of financing: their own paper and bank loans. It seems like it would be possible for the (large) companies to issue their own paper and then tap into their bank credit lines if they had trouble rolling the paper over for whatever reason. In effect, banks then, would be on the hook in that scenario. We could call this a covert liability, as it technically would not appear on the bank's balance sheet.</p>
<h2>Question</h2>
Would this be a fair characterization of how money market instruments interact with each other and on aggregate change the supply of money, seemingly circumventing the powers of the Federal Reserve (in terms of capital adequacy and all that alphabet soup around tier 1 capital)? If so, has anything changed since then?

<macroeconomics><central-banking><economic-history>
New financing instruments as covert leverage?
Arash Howaida
# New financing instruments as covert leverage?

(Asked by: username_0 on 2022-08-29)

Back when the Federal Reserve intervened in the commercial paper market in the 1970s, corporates essentially woke up the next morning and found they had two back-stopped modes of financing: their own paper and bank loans. It seems like it would be possible for the (large) companies to issue their own paper and then tap into their bank credit lines if they had trouble rolling the paper over for whatever reason. In effect, banks then, would be on the hook in that scenario. We could call this a covert liability, as it technically would not appear on the bank's balance sheet.

## Question

Would this be a fair characterization of how money market instruments interact with each other and on aggregate change the supply of money, seemingly circumventing the powers of the Federal Reserve (in terms of capital adequacy and all that alphabet soup around tier 1 capital)? If so, has anything changed since then?

**Tags:** macroeconomics, central-banking, economic-history


---

## 1 answers

### Answer by username_1 on 2022-08-30. Score: 1 | Accepted answer

Things have changed- Basel III requires capital to be held against committed but undrawn lines of credit <https://support.precisionlender.com/hc/en-us/articles/115009834408-Regulatory-Capital-Requirements-for-Line-of-Credit-Products>


---

