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

See all articles by Sean Collins

Sean Collins

Investment Company Institute - Research

Emily Gallagher

University of Colorado at Boulder - Department of Finance; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Jane Heinrichs

Investment Company Institute

Chris Plantier

USAA

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

Collins, Sean S. and Gallagher, Emily and Heinrichs, Jane and Plantier, L. Christopher, Money Market Mutual Funds, Risk, and Financial Stability in the Wake of the 2010 Reforms (January 15, 2013). ICI Research Perspective, Vol. 19, No. 1, January 2013. Available at SSRN: https://ssrn.com/abstract=2201110

Sean S. Collins

Investment Company Institute - Research ( email )

202-326-5882 (Phone)

Emily Gallagher

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jane Heinrichs

Investment Company Institute ( email )

1401 H Street, NW
Washington, DC 20005
United States

L. Christopher Plantier (Contact Author)

USAA ( email )

Fredericksburg Road
San Antonio, TX
703-795-3102 (Phone)

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