Economic Report of the President

ing services. Money-market mutual funds did not exist until 1971,but by August 1980 they had grown in value to over $80 billion.Corporate borrowers found it cheaper to bypass their traditionallending relationships with commercial banks and increased their relianceon nonbank sources of funds like the commercial paper market,where corporations sell direct short-term liabilities. The issuance ofcommercial paper by nonfinancial firms grew from 4 percent of thetotal short-term debt of business firms in 1972 to 7 percent in 1979.Meanwhile, foreign banks, which were not burdened by Federal Reserverequirements and which had well-developed foreign sources offunds, also began moving into U.S. markets, especially business lending.By capitalizing on the expansion of international trade and bypricing their loans aggressively, they increased their share of U.S.business loans from 4 percent in 1972 to 9 percent in 1979.U.S. banks have tried to keep their share of business loans by reducingtheir interest rates on loans to corporations with access to such alternativesources of funds. While the so-called prime rate is still thelowest rate offered to good customers lacking these alternatives,loans made at rates less than the prime rate are now commonplace.Nevertheless, the share of total short-term business debt held by domesticcommercial banks shrank from 86 percent in 1972 to 60 percentin 1979.Even as they sought innovative ways to bypass the regulatory structureand to maintain their markets, some depository institutionsurged regulatory agencies to loosen their restrictions. The call forderegulation was less than unanimous, however, since many institutionsbelieved that the regulatory structure still protected their profitablemarkets from encroachment by competitors. Nevertheless, experimentsin deregulation were conducted by both Federal and Statefinancial regulators in the 1970s (Table 11). In the early 1970s, forexample, interest rate ceilings on large time deposits ($100,000 ormore) were removed, in part to permit banks to meet the strongdemand for bank credit that developed when the failure of the PennCentral temporarily destabilized the commercial paper market. Thisaction provided banks and thrift institutions with new access to theopen market, and by the end of 1980 they held more than $250 billionin such deposits. More recent regulatory changes have allowedbanks and thrifts to compete for the funds of smaller savers by issuing6-month money-market certificates (MMCs) and 2V2-year smallsaver certificates (SSCs). These instruments, whose interest rate ceilingsare adjusted frequently to keep pace with market interest rates,had attracted roughly $475 billion to banks and thrift institutions bythe end of 1980.109