《货币银行学》课程教学资源（文献资料）The Decline of Traditional

The Decline of TraditionalBanking: Implications for FinancialStability and Regulatory PolicyFranklin R. Edwards and Frederic S. Mishkin The views expressed in this article are those of the authors and do not necessarily reflect the position of the FederalReserveBankofNewYorkortheFederalReserveSystem.The Federal Reserve Bank of New York provides no warranty, express or implied, as to the accuracy, timeliness, com-pleteness,merchantability,orfitness for any particularpurpose of any information contained in documents producedand provided by the Federal Reserve Bank of New York in any form or manner whatsoeverThe traditional banking business has been tonothing else,the prospect of a mass exodus from themake long-term loans and fund them by issu-banking industry (possibly via increased failures) coulding short-dated deposits, a process that iscause instability in the financial system. Of greater con-commonly described as “borrowing short andcern is that declining profitability could tip the incen-lending long.In recent years, fundamental economictives of bank managers toward assuming greater risk inforces have undercut the traditional role of banks in finan-an effort to maintain former profit levels.For example,cial intermediation.Asa sourceoffundsforfinancialinter-banks might make loans to less creditworthy borrowers ormediaries,deposits have steadily diminished in importance.engage in nontraditional financial activities that promiseIn addition, the profitability of traditional banking activi-higher returns but carry greater risk. A new activity thatties such as business lending has diminished in recenthas generated particular concern recently is the expand-years. As a result, banks have increasingly turned to new.ing role of banks as dealers in derivatives products. Therenontraditional financial activities as a way of maintainingis a fear that in seeking new sources of revenue in deriva-their position as financial intermediaries.2tives, banks may be taking risks that could ultimatelyThis article has two objectives: to examine theundermine their solvency and possibly the stability of theforces responsible for the declining role of traditionalbanking system.banking in the United States as well as in other countries,The challenge posed by the decline of traditionalandtoexploretheimplicationsofthisdeclineandbanksbanking is twofold:we need to maintain the soundness ofresponses to it for financial stability and regulatory polthebanking system whilerestructuring thebanking indus-icy. A key policy issue is whether the decline of bankingtry to achieve long-term financial stability. A sound regula-threatens to make the financial system more fragile. Iftory policy can encourage an orderly shrinkage of27FRBNYECONOMICPOLICYREVIEW/JULY1995

FRBNY ECONOMIC POLICY REVIEW / JULY 1995 27 The Decline of Traditional Banking: Implications for Financial Stability and Regulatory Policy Franklin R. Edwards and Frederic S. Mishkin 1 he traditional banking business has been to make long-term loans and fund them by issu￾ing short-dated deposits, a process that is commonly described as “borrowing short and lending long.” In recent years, fundamental economic forces have undercut the traditional role of banks in finan￾cial intermediation. As a source of funds for financial inter￾mediaries, deposits have steadily diminished in importance. In addition, the profitability of traditional banking activi￾ties such as business lending has diminished in recent years. As a result, banks have increasingly turned to new, nontraditional financial activities as a way of maintaining their position as financial intermediaries.2 This article has two objectives: to examine the forces responsible for the declining role of traditional banking in the United States as well as in other countries, and to explore the implications of this decline and banks’ responses to it for financial stability and regulatory pol￾icy. A key policy issue is whether the decline of banking threatens to make the financial system more fragile. If nothing else, the prospect of a mass exodus from the banking industry (possibly via increased failures) could cause instability in the financial system. Of greater con￾cern is that declining profitability could tip the incen￾tives of bank managers toward assuming greater risk in an effort to maintain former profit levels. For example, banks might make loans to less creditworthy borrowers or engage in nontraditional financial activities that promise higher returns but carry greater risk. A new activity that has generated particular concern recently is the expand￾ing role of banks as dealers in derivatives products. There is a fear that in seeking new sources of revenue in deriva￾tives, banks may be taking risks that could ultimately undermine their solvency and possibly the stability of the banking system. The challenge posed by the decline of traditional banking is twofold: we need to maintain the soundness of the banking system while restructuring the banking indus￾try to achieve long-term financial stability. A sound regula￾tory policy can encourage an orderly shrinkage of T The views expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. The Federal Reserve Bank of New York provides no warranty, express or implied, as to the accuracy, timeliness, com￾pleteness, merchantability, or fitness for any particular purpose of any information contained in documents produced and provided by the Federal Reserve Bank of New York in any form or manner whatsoever

traditional banking while strengthening the competitiveThrift institutions (savings and loans, mutual savingsposition of banks,possibly by allowing them to expandbanks, and credit unions),which can be viewed as special-intomoreprofitable,nontraditionalactivities.Inthetran-ized banking institutions, have also suffered a decline insitional period, of course, regulators would have to con-market share, from more than 20 percent in the late 1970stinue to guard against excessive risk taking that couldtobelow10percent inthe1990s (Chart2)threaten financial stabilityAnother way of viewing the declining role ofThe first part of our article documents the declin-banking in traditional financial intermediation is to look ating financial intermediation role of traditional banks inthe United States.We discuss the economic forces drivingIn the United States, the importance ofthis decline, in both the United States and foreign coun-tries,and describe how banks have responded to thesecommercial banks as a source of funds topressures. Included in this discussion is an examina-nonfinancial borrowers has shrunktion of banks'activities in derivatives markets, a par-ticularly fast-growing area of their off-balance-sheetdramatically.In 1974 banks providedactivities.Finally,weexaminetheimplicationsof the35 percent of these funds; today theychanging nature of banking for financial fragility andregulatorypolicyprovide around 22 percent.THEDECLINE OF TRADITIONALBANKINGIN THE UNITED STATESthe size of banks'balance-sheet assets relative to those ofIn the United States,the importance ofcommercial banksotherfinancialintermediaries(Table1).Commercialbanksas a source of funds to nonfinancial borrowers has shrunkshare of total financial intermediary assets fell from arounddramatically. In 1974 banks provided 35 percent of thesethe 40 percent range in the 1960-80 period to belowfunds; today they provide around 22 percent (Chart 1)30percentbytheendof1994.Similarly,theshareoftotalfinancial intermediary assets held by thrift institutionsChart IChart 2CommercialBanks'ShareofTotalNonfinancialThrifts' Share of Total Nonfinancial BorrowingBorrowing1960-941960-94PercentPercent254035110255 LL120 LL70809196065707580859094196065759094Source: Board of Governors of the Federal Reserve System, Flow ofSource: Board of Governors of the Federal Reserve System, Flow ofFunds AccountsFunds Accounts.28FRBNYECONOMICPOLICYREVIEW/JULY1995

28 FRBNY ECONOMIC POLICY REVIEW / JULY 1995 traditional banking while strengthening the competitive position of banks, possibly by allowing them to expand into more profitable, nontraditional activities. In the tran￾sitional period, of course, regulators would have to con￾tinue to guard against excessive risk taking that could threaten financial stability. The first part of our article documents the declin￾ing financial intermediation role of traditional banks in the United States. We discuss the economic forces driving this decline, in both the United States and foreign coun￾tries, and describe how banks have responded to these pressures. Included in this discussion is an examina￾tion of banks’ activities in derivatives markets, a par￾ticularly fast-growing area of their off-balance-sheet activities. Finally, we examine the implications of the changing nature of banking for financial fragility and regulatory policy. THE DECLINE OF TRADITIONAL BANKING IN THE UNITED STATES In the United States, the importance of commercial banks as a source of funds to nonfinancial borrowers has shrunk dramatically. In l974 banks provided 35 percent of these funds; today they provide around 22 percent (Chart 1). Thrift institutions (savings and loans, mutual savings banks, and credit unions), which can be viewed as special￾ized banking institutions, have also suffered a decline in market share, from more than 20 percent in the late 1970s to below 10 percent in the 1990s (Chart 2). Another way of viewing the declining role of banking in traditional financial intermediation is to look at the size of banks’ balance-sheet assets relative to those of other financial intermediaries (Table 1). Commercial banks’ share of total financial intermediary assets fell from around the 40 percent range in the 1960-80 period to below 30 percent by the end of 1994. Similarly, the share of total financial intermediary assets held by thrift institutions In the United States, the importance of commercial banks as a source of funds to nonfinancial borrowers has shrunk dramatically. In l974 banks provided 35 percent of these funds; today they provide around 22 percent. Chart 1 Percent 1960 65 70 75 80 85 90 94 20 25 30 35 40 Commercial Banks’ Share of Total Nonfinancial Borrowing 1960-94 Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts. Chart 2 Percent Thrifts’ Share of Total Nonfinancial Borrowing 1960-94 1960 65 70 75 80 85 90 94 5 10 15 20 25 Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts

Overallbankprofitability,however,isnotagoodTableRELATIVESHARES OFTOTALFINANCIALINTERMEDIARYindicatoroftheprofitabilityoftraditionalbankingbecauseASSETS,1960-94Percentitincludestheincreasinglyimportantnontraditional busi19601970198019901994nesses of banks. As a share of total bank income, noninter-Insurance companiesest income derived from off-balance-sheet activities, such12.519.615.311.513.0Life insurance4.44.9Property and casualty3.84.54.6as fee and trading income, averaged 19 percent in the Pension funds1960-80period(Chart4).By1994,thissourceofincome6.4Private8.412.514.916.2Public (state and localhad grown to about 35 percent of total bank income.3.34.64.96.78.4government)4.74.95.15.65.3Finance companiesAlthough some of this growth in fee and trading incomeMutual fundsmay be attributable to an expansion of traditional fee activ-2.93.61.75.910.8Stock and bond0.00.01.94.64.2Money marketities,much of it isnot.Depository institutions (banks)Commercial banks38.638.537.230.428.6Acrudemeasureof theprofitabilityof thetradi-Savings and loans andtional banking business is to excludenoninterest income19.019.419.612.57.0mutual savings1.11.41.62.02.0Credit unionsfrom total earnings, since much of this income comes fromTotal100.0100.0100.0100.0100.0nontraditional activities.By thismeasure,the pretax returnSource: Board of Governors of the Federal Reserve System, Flow of Fundson equity fell from more than 10 percent in 1960 to levelsAccounts.that approached negative 10percent in the late1980s andearly1990s(Chart5).Thismeasure,however,doesnotdeclined from around 20 percent in the 1960-80 period toadjustfortheexpensesassociatedwithgeneratingnonin-below10 percent by1994.3Boyd and Gertler (1994) and Kaufman and Mote(1994)correctlypoint outthatthedeclineintheshareofChart 3total financial intermediary assets held by banking institu-ReturnonAssetsandEquityforCommercialBanks1960-94tions does not necessarily indicatethat the banking indus-try is in decline.Because banks have been increasing theirPercentPercent222.0off-balance-sheetactivities (an issuewediscuss below),wemay understate their role in financial markets if we look1.820Return on equitysolely at the on-balance-sheet activities.However,theScale1.618decline in traditional banking,which isreflected in thedecline in banks' share of total financial intermediary1.416assets,raisesimportantpolicyissuesthatarethefocusof1.2-this article.There is also evidence of an erosion in traditional121.0banking profitability. Nevertheless, standard measures ofcommercial bank profitability such as pretax rates of0.810Return on assetsScalereturn on assets and equity (shown in Chart 3) do not pro-0.68vide a clear picture of the trend in bank profitabilityAlthough banks'before-tax rate of return on equity0.46declined from an average of 15 percent in the 1970-844 L0.2period to below 12 percent in the 1985-91 period, bank19606570758085.9094profits improved sharply beginning in 1992, and 1994Sources: Federal Deposit Insurance Corporation, Statistis an Banking andwasarecord yearforbankprofits.Quarterly Banking Profile29FRBNYECONOMICPOLICYREVIEW/JULY1995

FRBNY ECONOMIC POLICY REVIEW / JULY 1995 29 declined from around 20 percent in the 1960-80 period to below 10 percent by 1994.3 Boyd and Gertler (1994) and Kaufman and Mote (1994) correctly point out that the decline in the share of total financial intermediary assets held by banking institu￾tions does not necessarily indicate that the banking indus￾try is in decline. Because banks have been increasing their off-balance-sheet activities (an issue we discuss below), we may understate their role in financial markets if we look solely at the on-balance-sheet activities. However, the decline in traditional banking, which is reflected in the decline in banks’ share of total financial intermediary assets, raises important policy issues that are the focus of this article. There is also evidence of an erosion in traditional banking profitability. Nevertheless, standard measures of commercial bank profitability such as pretax rates of return on assets and equity (shown in Chart 3) do not pro￾vide a clear picture of the trend in bank profitability. Although banks’ before-tax rate of return on equity declined from an average of 15 percent in the 1970-84 period to below 12 percent in the 1985-91 period, bank profits improved sharply beginning in 1992, and 1994 was a record year for bank profits. Overall bank profitability, however, is not a good indicator of the profitability of traditional banking because it includes the increasingly important nontraditional busi￾nesses of banks. As a share of total bank income, noninter￾est income derived from off-balance-sheet activities, such as fee and trading income, averaged 19 percent in the 1960-80 period (Chart 4). By 1994, this source of income had grown to about 35 percent of total bank income. Although some of this growth in fee and trading income may be attributable to an expansion of traditional fee activ￾ities, much of it is not. A crude measure of the profitability of the tradi￾tional banking business is to exclude noninterest income from total earnings, since much of this income comes from nontraditional activities. By this measure, the pretax return on equity fell from more than 10 percent in 1960 to levels that approached negative 10 percent in the late 1980s and early 1990s (Chart 5). This measure, however, does not adjust for the expenses associated with generating nonin￾Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts. Table 1 RELATIVE SHARES OF TOTAL FINANCIAL INTERMEDIARY ASSETS, 1960-94 Percent 1960 1970 1980 1990 1994 Insurance companies Life insurance 19.6 15.3 11.5 12.5 13.0 Property and casualty 4.4 3.8 4.5 4.9 4.6 Pension funds Private 6.4 8.4 12.5 14.9 16.2 Public (state and local government) 3.3 4.6 4.9 6.7 8.4 Finance companies 4.7 4.9 5.1 5.6 5.3 Mutual funds Stock and bond 2.9 3.6 1.7 5.9 10.8 Money market 0.0 0.0 1.9 4.6 4.2 Depository institutions (banks) Commercial banks 38.6 38.5 37.2 30.4 28.6 Savings and loans and mutual savings 19.0 19.4 19.6 12.5 7.0 Credit unions 1.1 1.4 1.6 2.0 2.0 Total 100.0 100.0 100.0 100.0 100.0 Return on Assets and Equity for Commercial Banks 1960-94 Chart 3 Percent Sources: Federal Deposit Insurance Corporation, Statistics on Banking and Quarterly Banking Profile. 4 6 8 10 12 14 16 18 20 22 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 1960 65 70 75 80 85 90 94 Percent Return on equity Scale Return on assets Scale

Chart 4terest incomeandthereforeoverstatesthedeclineintheShareofNoninterestIncomeinTotal Incomeprofitability of traditional banking.Another indicator offor Commercial Banksthedeclineintheprofitabilityoftraditional bankingisthe1960-94fall in the ratio of market value to book value of bank capi-Percenttal fromthemid-1960stotheearly1980s.Asnotedby35Keeley(1990),thisfall indicatesthatbankcharterswerebecoming less valuable in this period (Chart 6).The30decline in the value of bank charters in the years precedingthe sharp increase in nontraditional activities supports the25viewthattherewasa substantial decline intheprofitabilityoftraditional banking.Onlywiththeriseinnontraditional20activitiesthatbegins intheearly1980s(Chart4)doesthemarket value of banksbegintorise.15 L196094657075808590WHYISTRADITIONALBANKINGSources: Federal Deposit Insurance Corporation, Statistis an Banking andINDECLINE?Quarterly Banking ProfileFundamental economic forces have led to financial innova-tions that have increased competition in financial markets.Greater competition in turn has diminished the costadvantage banks have had in acquiring funds and hasundercut their position in loan markets. As a result, tradiChart5tional banking has lost profitability,and banks have begunReturnonAssetsandEquityforCommercialBankstodiversifyintonewactivitiesthatbringhigherreturns.ExcludingNoninterestIncome1960-94PercentPercent120.94Chart6Return on equityEquity-to-AssetRatios,MarketValuevs.BookValue30.6Scale1960-930.3Percent20Return on assetsScale00Market value of equity15-4-0.30-8-0.6-12-0.95Book value of equity-16-1.2o11196065707580938590-20 LL/L-1.51:1196065707580859094Source: Standard and Poor's Compustat.Sources:Federal Deposit Insurance Corporation, Statistics an Banking andNote: Chart presents equity-to-asset ratios for the top twenty-five bankQuarterlyBanking Profileholding companies in each year.30FRBNYECONOMICPOLICYREVIEW/JULY1995

30 FRBNY ECONOMIC POLICY REVIEW / JULY 1995 terest income and therefore overstates the decline in the profitability of traditional banking. Another indicator of the decline in the profitability of traditional banking is the fall in the ratio of market value to book value of bank capi￾tal from the mid-1960s to the early 1980s. As noted by Keeley (1990), this fall indicates that bank charters were becoming less valuable in this period (Chart 6). The decline in the value of bank charters in the years preceding the sharp increase in nontraditional activities supports the view that there was a substantial decline in the profitability of traditional banking. Only with the rise in nontraditional activities that begins in the early 1980s (Chart 4) does the market value of banks begin to rise. WHY IS TRADITIONAL BANKING IN DECLINE? Fundamental economic forces have led to financial innova￾tions that have increased competition in financial markets. Greater competition in turn has diminished the cost advantage banks have had in acquiring funds and has undercut their position in loan markets. As a result, tradi￾tional banking has lost profitability, and banks have begun to diversify into new activities that bring higher returns. Chart 4 Percent 1960 65 70 75 80 85 90 94 15 20 25 30 35 Share of Noninterest Income in Total Income for Commercial Banks 1960-94 Sources: Federal Deposit Insurance Corporation, Statistics on Banking and Quarterly Banking Profile. Chart 6 Percent 0 5 10 15 20 1960 65 70 75 80 85 90 93 Book value of equity Market value of equity Source: Standard and Poor’s Compustat. Note: Chart presents equity-to-asset ratios for the top twenty-five bank holding companies in each year. Equity-to-Asset Ratios, Market Value vs. Book Value 1960-93 Return on Assets and Equity for Commercial Banks Excluding Noninterest Income 1960-94 Chart 5 Percent Sources: Federal Deposit Insurance Corporation, Statistics on Banking and Quarterly Banking Profile. -20 -16 -12 -8 -4 0 4 8 12 -1.5 -1.2 -0.9 -0.6 -0.3 0 0.3 0.6 0.9 1960 65 70 75 80 85 90 94 Percent Return on assets Scale Return on equity Scale

DIMINISHEDADVANTAGEINACQUIRINGFUNDScost of funds rose substantially.reducing the cost advan(LIABILITIES)tage they enjoyed.Until1980,deposits were a cheapsource offundsforU.Sbanking institutions (commercial banks, savings and loans,DIMINISHED INCOME (OR LOAN) ADVANTAGESmutual savings banks, and credit unions). Deposit rateBanks have also experienced a deterioration in the incomeceilings prevented banks from paying interest on checkableadvantages they once enjoyed on theasset side of their bal-deposits,and Regulation Q limited them to paying speci-ancesheets.Thegrowthof thecommercialpaperandjunkfied interest rate ceilings on savings and time deposits. Forbond markets and the increased securitization of assetsmany years, these restrictions worked to the advantage ofhave undercut banks' traditional advantage in providingcredit.banks because a major source of bank funds was checkableImprovements in information technology,whichdeposits (in 1960 and earlier years, these deposits consti-tuted more than 60 percent of total bank deposits).Thehave made it easier for households,corporations, and finan-zero interest cost on these deposits resulted in banks hav-cial institutions to evaluate the quality of securities, haveing a low average cost of funds.made it easier for business firms to borrow directly fromThis cost advantage did not last. The rise in inflathe public by issuing securities. In particular, instead oftion beginning in the late 1960s led to higher interestgoing to banks to finance short-term credit needs, manyratesandmadeinvestorsmoresensitivetoyielddifferen-businesscustomersnowborrowthroughthecommercialtials on different assets. The result was the so-called disin-paper market.Total nonfinancial commercial paper out-termediationprocess,in whichdepositors took theinstanding as a percentage of commercial and industrial bankmoney out of banks paying low interest rates on bothloanshas risen from5percent in1970 tomore than 20per-checkable and time deposits and purchased higher yield-cent today.ing assets. In addition, restrictive bank regulations cre-The rise of money market mutual funds has alsoated an opportunity for nonbank financial institutions toindirectly undercut banks by supporting the expansion ofinvent new ways to offer bank depositors higher rates.competing finance companies.The growth of assets inNonbank competitors were not subject to deposit ratemoney market mutual funds to more than S500 billionceilings and did not have the costs associated with havingcreated a ready market for commercial paper becauseto hold non-interest-bearing reserves and paying depositmoney market mutual funds must hold liquid, highinsurance premiums. Akey development was the creationquality, short-term assets.Further, the growth in theof money market mutual funds. which put banks at acommercial paper market has enabled finance companies,competitive disadvantage because money market mutualwhich depend on issuing commercial paper for much offund shareholders (or depositors) could obtain check-their funding, to expand their lending at the expense ofwriting services while earning a higher interest rate onbanks. Finance companies provide credit to many of thetheir funds. Not surprisingly, as a source of funds forsame businesses that bankshave traditionallyserved.Inbanks, low-cost checkable deposits declined dramatically.1980,financecompanyloanstobusinesses amountedtofallingfrom 60 percent ofbank liabilities in 1960 to underabout 30 percent of banks' commercial and industrial20 percent today.loans;today these loans constitutemorethan60percentofThe growing disadvantage of banks in raisingbanks'commercialandindustrial loans.funds led to their supporting legislation in the 1980s toThe junk bond market has also taken business awayeliminate Regulation Q ceilings on time deposits and tofrombanks.Inthepast,onlyFortune500companieswereallow checkable deposits that paid interest (NOWable to raise funds by selling their bonds directly to the pub-accounts).Although the ensuing changes helped to makelic,bypassingbanks.Now,evenlower quality corporatebor-banks more competitive in their quest forfunds,the banksrowers can readily raise funds through access to the junk31FRBNYECONOMICPOLICYREVIEW/JULY1995

FRBNY ECONOMIC POLICY REVIEW / JULY 1995 31 DIMINISHED ADVANTAGE IN ACQUIRING FUNDS (LIABILITIES) Until 1980, deposits were a cheap source of funds for U.S. banking institutions (commercial banks, savings and loans, mutual savings banks, and credit unions). Deposit rate ceilings prevented banks from paying interest on checkable deposits, and Regulation Q limited them to paying speci- fied interest rate ceilings on savings and time deposits. For many years, these restrictions worked to the advantage of banks because a major source of bank funds was checkable deposits (in l960 and earlier years, these deposits consti￾tuted more than 60 percent of total bank deposits). The zero interest cost on these deposits resulted in banks hav￾ing a low average cost of funds. This cost advantage did not last. The rise in infla￾tion beginning in the late 1960s led to higher interest rates and made investors more sensitive to yield differen￾tials on different assets. The result was the so-called disin￾termediation process, in which depositors took their money out of banks paying low interest rates on both checkable and time deposits and purchased higher yield￾ing assets. In addition, restrictive bank regulations cre￾ated an opportunity for nonbank financial institutions to invent new ways to offer bank depositors higher rates. Nonbank competitors were not subject to deposit rate ceilings and did not have the costs associated with having to hold non-interest-bearing reserves and paying deposit insurance premiums. A key development was the creation of money market mutual funds, which put banks at a competitive disadvantage because money market mutual fund shareholders (or depositors) could obtain check￾writing services while earning a higher interest rate on their funds. Not surprisingly, as a source of funds for banks, low-cost checkable deposits declined dramatically, falling from 60 percent of bank liabilities in l960 to under 20 percent today. The growing disadvantage of banks in raising funds led to their supporting legislation in the 1980s to eliminate Regulation Q ceilings on time deposits and to allow checkable deposits that paid interest (NOW accounts). Although the ensuing changes helped to make banks more competitive in their quest for funds, the banks’ cost of funds rose substantially, reducing the cost advan￾tage they enjoyed. DIMINISHED INCOME (OR LOAN) ADVANTAGES Banks have also experienced a deterioration in the income advantages they once enjoyed on the asset side of their bal￾ance sheets. The growth of the commercial paper and junk bond markets and the increased securitization of assets have undercut banks’ traditional advantage in providing credit. Improvements in information technology, which have made it easier for households, corporations, and finan￾cial institutions to evaluate the quality of securities, have made it easier for business firms to borrow directly from the public by issuing securities. In particular, instead of going to banks to finance short-term credit needs, many business customers now borrow through the commercial paper market. Total nonfinancial commercial paper out￾standing as a percentage of commercial and industrial bank loans has risen from 5 percent in l970 to more than 20 per￾cent today. The rise of money market mutual funds has also indirectly undercut banks by supporting the expansion of competing finance companies. The growth of assets in money market mutual funds to more than $500 billion created a ready market for commercial paper because money market mutual funds must hold liquid, high￾quality, short-term assets. Further, the growth in the commercial paper market has enabled finance companies, which depend on issuing commercial paper for much of their funding, to expand their lending at the expense of banks. Finance companies provide credit to many of the same businesses that banks have traditionally served. In 1980, finance company loans to businesses amounted to about 30 percent of banks’ commercial and industrial loans; today these loans constitute more than 60 percent of banks’ commercial and industrial loans. The junk bond market has also taken business away from banks. In the past, only Fortune 500 companies were able to raise funds by selling their bonds directly to the pub￾lic, bypassing banks. Now, even lower quality corporate bor￾rowers can readily raise funds through access to the junk