14 In the secured money markets, lenders mitigate credit risk exposure by requiring borrowers to post collateral, and by imposing haircuts on collateral values. While attenuated credit risk concerns may make it easier for borrowing banks to obtain credit, secured funding comes at the cost of acquiring and holding collateral, as well as relatively weaker incentives for lending banks to conduct monitoring.
Developments in money markets can have profound implications for financial stability and the functioning of the entire economy, for they affect the financing conditions faced by nonfinancial corporations and households. Being an essential source of bank funding, money markets have a significant impact on the size of the balance sheet of financial institutions and the amount of credit they can extend.