How Can the Risk of Runs on Money Market Funds Be Reduced?
93 Pages Posted: 18 May 2012 Last revised: 8 Jun 2012
Date Written: May 10, 2012
Federal Reserve officials, the chairman of the Securities and Exchange Commission, and others have claimed that money market funds are susceptible to runs that can “devastate” the U.S. economy. This paper examines such claims and shows that they are incorrect and reflect a highly misleading view of MMFs and the events of 2007-2008. Moreover, suggested structural changes in MMFs will not reduce the risk of runs, are misdirected, and could increase systemic risks and reduce funding to important economic sectors. This paper examines the role of MMFs under two potential “doomsday” scenarios and concludes that under neither scenario would MMFs be the cause of financial instability or economic devastation.
Keywords: money market funds, MMFs, runs, money market fund run, financial crisis, floating NAV, NAV, Europe, earthquake, Federal Reserve, systemic risk, capital buffer, Squam Lake, Schapiro, Rule 2a-7
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