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By Charles R. Geisst (auth.)

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1 *Includes general purpose funds and institutional funds SOURCE: Federal Reserve Bul/etin, May 1986 47 Commercial Banking with money market funds and other new interest rate sensitive instruments in order to retain their source of funds. The way in which funds are diverted by money market mutual funds provides a classic example of the disintermediation process upon commercial banks. When the individual invests in a fund, he either withdraws money from a more traditional bank account or diverts funds ordinarily intended for such an account.

In this respect, the bank acts as investment advisor to the client and also holds the securities in safekeeping. This is one area in which banks compete with many other investment organisations on an active basis for the right to manage the public's money, especially that of large institutional investors such as pension funds or insurance companies. A large portion of a commercial bank's activities has been extended overseas through branches in order to engage in overseas financing for customers, whether they be domestic clients doing business overseas or purely foreign sources of business.

The category of commercial and industrial loans is the most carefully monitored on a short-term basis and is reported weekly in the United States along with other monetary statistics such as the growth of the money supply. These loans are a good indicator of the amount of inventory financing conducted by business. Since they are normally made on a short-term basis they also provide a leading indication of how businesses view, and are coping with, the economy. Within their lending activities, banks are able to perform one economic function that no other financial institution possesses; the ability to create money.

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