Financial Institutions of the Money Market

The money market may also be analyzed on the basis of the different institutions engaged in lending and borrowing short-term funds. The nature of these institutions may differ from country to country. The same institutions may also function both as borrower and as lender in the market. The lenders are:

1. The Central Bank: It is the lender of last resort. It lends money to commercial banks when they approach for financial assistance.

2. Commercial Banks: They form the most important class of lenders in the money market. They also borrow from the central bank directly or indirectly. The money that they lend comes from the public in the form of deposits repayable on demand. These funds are invested in various forms of assets. These assets which are considered the secondary reserve for the bank are closely linked with the money market.

3. Institutional Investors: They include savings banks, insurance companies, trust companies and investment trusts. The portion of their funds kept invested in liquid assets finds its way into the money market.

4. Private Individuals, Partnerships and Companies: Normally this group may not be interested in short-term funds. If the interest rates become attractive, they may divert a portion of their surplus funds to the money market.

The borrowers in the money market must satisfy certain conditions regarding the paper they offer for discounting. “The paper must be absolutely liquid, easily realizable and short of maturity.” These conditions are satisfied by bill brokers and dealers in stock exchange.