Money Market Funds Intermediation, Bank Instability, and Contagion

31 Pages Posted: 8 Feb 2013

See all articles by Marco Cipriani

Marco Cipriani

Federal Reserve Bank of New York

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Bruno Maria Parigi

University of Padova - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 1, 2013

Abstract

In recent years, U.S. banks have increasingly relied on deposits from financial intermediaries, especially money market funds (MMFs), which collect funds from large institutional investors and lend them to banks. In this paper, we show that intermediation through MMFs allows investors to limit their exposure to a given bank (i.e., reap gains from diversification). However, since MMFs are themselves subject to runs from their own investors, a banking system intermediated through MMFs is more unstable than one in which investors interact directly with banks. A mechanism through which instability can arise in an MMF-intermediated financial system is the release of private information on bank assets, which is aggregated by MMFs and could lead them to withdraw en masse from a bank. In addition, we show that MMF intermediation can also be a channel of contagion among banking institutions.

Keywords: money market funds, bank runs

JEL Classification: G01, G21, G23

Suggested Citation

Cipriani, Marco and Martin, Antoine and Parigi, Bruno Maria, Money Market Funds Intermediation, Bank Instability, and Contagion (February 1, 2013). FRB of New York Staff Report No. #599, Available at SSRN: https://ssrn.com/abstract=2213314 or http://dx.doi.org/10.2139/ssrn.2213314

Marco Cipriani (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Antoine Martin

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

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

Bruno Maria Parigi

University of Padova - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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