Money Market Mutual Funds, Risk, and Financial Stability in the Wake of the 2010 Reforms
ICI Research Perspective, Vol. 19, No. 1, January 2013
56 Pages Posted: 16 Jan 2013
Date Written: January 15, 2013
Abstract
Following comprehensive reforms to their regulatory structure in 2010, money market funds were hit in the summer of 2011 by two financial market shocks: the standoff over the U.S. federal debt ceiling and deteriorating conditions in eurozone debt markets. Anticipating that concerns about the debt ceiling impasse might lead investors to redeem shares, both government and prime funds shortened their maturities in the weeks leading up to a key August 2011 deadline. Funds also maintained levels of liquidity well above new liquidity requirements. Money market funds gradually reduced their holdings to banks most exposed to the unfolding debt crisis in Europe. Prime money market fund holdings of banks in the eurozone fell from 30 percent of their assets in May 2011 to 11 percent by December 2011. Prime funds also reduced their exposures to other European banks that, although outside of the eurozone itself, were exposed to eurozone banks. Bolstered by the 2010 reforms, money market funds easily met the heightened 2011 redemptions triggered by market difficulties. Prime money market funds had plentiful liquidity to meet redemptions in the summer of 2011. As of May 31, 2011, prime money market funds held an estimated $626 billion in weekly liquid assets, well in excess of the outflows they experienced over the next several months. Evidence from 2011 shows that prime money market funds took only marginally more credit risk than did Treasury-only money market funds. Analysis of credit default swap spreads (when calibrated to the securities money market funds held) shows that the credit risk in prime money market fund portfolios remained minimal throughout 2011 despite small increases as the eurozone crisis progressed in the second half of 2011.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Cross Section of Money Market Fund Risks and Financial Crises
-
The Cross Section of Money Market Fund Risks and Financial Crises
-
Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System
-
Runs on Money Market Mutual Funds
By Lawrence Schmidt, Allan Timmermann, ...
-
Runs on Money Market Mutual Funds
By Russ Wermers
-
By Lawrence Schmidt, Allan Timmermann, ...
-
The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds
By Patrick E. Mccabe, Marco Cipriani, ...
-
The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds
By Patrick E. Mccabe, Marco Cipriani, ...