The Financial Stability Report recently had a paper on money market instruments and in one of the sections was a line that read:
CP rates enter as inputs into credit-sensitive benchmark rates, and hence through pricing channels of propagation. Hence the outstanding notional value of CP and CDs may understate their systemic importance.
I have a feeling the answer is staring me in the face, but I still don't quite get it.
Perhaps it's something similar to when a credit rating agency downgrades a company to below IG status, triggering conservative institutions who are mandated to hold only IG debt to sell it. This is a mechanical effect. I'm guessing this CP thing is something similar?
Question
Can someone explain in simple/easy terms what the Financial Stability Board meant by pricing channel propagation and how that affects the systemic importance of the asset class?
