The Financial Stability Oversight Council's Proposals for Money Market Fund Reform

Abstract

This paper examines the Financial Stability Oversight Council's proposals for money market fund reform. It finds the proposals flawed by the lack of empirical support for the underlying premise that MMFs are susceptible to runs such that drastic changes are needed in their structure. Similarly, it finds empirical support lacking for the Council’s proposed determination that MMFs spread systemic risk. The paper shows that “systemic risk” and “financial stability” are developing concepts not completely understood by either regulators or academic economists. It suggests that regulators should wait for the results of ongoing research before proceeding with MMF changes in the name of “systemic risk” when such changes could harm investors, damage the short-term credit markets, and have other unintended consequences for financial stability. Also, this paper argues that the Council cannot meaningfully consider the role of MMFs in the financial system until the role of banking organizations is clarified through reforms that remain as yet unimplemented.

Keywords: money market funds, MMFs, Financial Stability Oversight Council, systemic risk, financial stability, Dodd-Frank Act, section 120, runs, Office of Financial Research, financial crisis