The Money Market: Cash or Financial Securities Market?

As a highly concentrated and interconnected market of operators, the money market is particularly sensitive to any kind of uncertainty relating to the quality of its actors’ balance sheets. It has therefore changed over the past three years to adapt to both asymmetric information and uncertainty. The loss of confidence in the reliability of the big financial institutions’ balance sheets has entailed a significant decrease in unsecured transactions, the development of collateralization and the strengthening of the security procedures that preside over transactions and positions (loan insurance). These changes aimed to invigorate the refunding market and controlled by the Central Bank strengthen the link between government debt and the banks’ balance sheets at a time when the pressure of market discipline on the former is mounting. They also lead the Central Bank to take riskier positions and potentially bail out a bank (the clearing house) that has proved insolvent, and not only short of liquidity.