This is a plot of the sum of financial sector commercial paper (CP) and primary dealer repos, as a fraction of M2.
Financial CP is primarily used to finance the activities of the “market based banking system” (sometimes called the “shadow banking system”).
The market based banking system comprises institutions that act like banks, but that do not possess the “carrots and sticks” of banks. In particular, they are institutions that hold securitized credit on the asset side of their balance sheet (for example, pools of credit card receivables, pools of car loans, or pools of mortgages), and that finance those assets by issuing commercial paper. However, such institutions are not banks, i.e. they do not usually have access to the discount window or FDIC insurance (the “carrots”), and are often subject to less regulation than traditional commercial banks (the “stick”). Such market based banking institutions could be structured investment vehicles (SIVs), or finance companies. The other important set of market based financial intermediaries are security broker dealers. Broker dealers often use repo transactions to finance their balance sheet.
More info: see page 6 to 10: Prices and Quantities in the Monetary Policy Transmission Mechanism by Tobias Adrian and Hyun Song Shin, FRBNY
Thank you for the post. Although one tires of “shadow banking.” Perhaps “auxiliary liquidity system” is a more apt description.