The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds

79 Pages Posted: 9 Aug 2012

See all articles by Patrick E. McCabe

Patrick E. McCabe

Board of Governors of the Federal Reserve System

Marco Cipriani

Federal Reserve Bank of New York

Michael Holscher

Independent

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2012

Abstract

This paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor's recent balances, called the "minimum balance at risk" (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions would subordinate a portion of an investor's MBR, creating a disincentive to redeem if the fund is likely to have losses. In normal times, when the risk of MMF losses is remote, subordination would have little effect on incentives. We use empirical evidence, including new data on MMF losses from the U.S. Treasury and the Securities and Exchange Commission, to calibrate an MBR rule that would reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises.

Keywords: money market funds, runs, redemption restrictions, systemic risk

JEL Classification: G01, G20, G28

Suggested Citation

McCabe, Patrick E. and Cipriani, Marco and Holscher, Michael and Martin, Antoine, The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds (July 2012). FRB of New York Staff Report No. 564. Available at SSRN: https://ssrn.com/abstract=2126235 or http://dx.doi.org/10.2139/ssrn.2126235

Patrick E. McCabe

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Marco Cipriani

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Michael Holscher

Independent ( email )

No Address Available

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

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