Why Has the Nonfinancial Commercial Paper Market Shrunk Recently ?

The total volume of nonfinancial commercial paper outstanding peaked in the fall of 2000 and has declined rapidly ever since. By September 2002, the market had shrunk more than 50 percent. Relative to historical patterns, both the magnitude and the timing of the decline are unusual. The decline is the largest on record, and the market started to shrink before the recent recession began. In the past, the volume of commercial paper outstanding tended to increase during the early stages of recessions. Commercial paper is an important source of external funding for corporate borrowers and has become increasingly popular over the years. In 1966, the volume of nonfinancial commercial paper outstanding was typically less than 0.5 percent of bank loans to commercial and industrial borrowers. Since then, growth in the commercial paper market has averaged more than 20 percent per year, compared to an average rate of only 7 percent for bank commercial and industrial loans. And despite the recent dramatic decline, the volume of commercial paper outstanding in September 2002 was still about one-sixth of bank commercial and industrial loans.