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Federally-Insured Money Market Funds and Narrow Banks: The Path of Least Insurance

30 Pages Posted: 4 Mar 2009  

Mercer Bullard

University of Mississippi - School of Law

Date Written: March 2, 2009

Abstract

In September 2008, the Treasury created a temporary insurance program for money market funds ("MMFs"), which had never previously been covered by government insurance. This essay argues that this program should be made permanent. To the extent that deposit insurance is intended to protect cash accounts that provide a stable foundation for our payments system, similar insurance should be made available to MMFs, which serve this function while presenting less risk than bank deposits. The argument that only bank accounts should be insured because the liquidity they create for long-term ventures otherwise would dry up might once have made sense, but it no longer reflects modern financial markets where liquidity creation has become broadly diversified. Deposit insurance also should be made available to bank deposits backed by short-term assets (like MMFs) that would be relieved of burdens to which other bank deposits are subject, such as the Community Reinvestment Act.

Keywords: bank, money market, money market fund, deposit insurance, FDIC, liquidity creation, payments system

JEL Classification: G18, G21, K22, K00, K23, G00

Suggested Citation

Bullard, Mercer, Federally-Insured Money Market Funds and Narrow Banks: The Path of Least Insurance (March 2, 2009). Available at SSRN: https://ssrn.com/abstract=1351987 or http://dx.doi.org/10.2139/ssrn.1351987

Mercer Bullard (Contact Author)

University of Mississippi - School of Law ( email )

Lamar Law Center
P.O. Box 1848
University, MS 38677
United States

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