Meddling in Money Market Funds

Abstract

This paper questions why twelve Federal Reserve Bank presidents have interposed themselves in a rulemaking by the Securities and Exchange Commission concerning money market funds. The Reserve Banks have no jurisdiction over money market funds, no collective expertise in their operations, and no experience regulating them. The Reserve Banks have done seemingly little to advance the outstanding agenda of bank regulatory reforms mandated by the Dodd-Frank Act to address the causes of the 2008 financial crisis. It thus is curious why they have made money market funds a cause célèbre when so many critical areas of banking supervision require their attention. Equally curious is why they have advocated changes in MMFs that are greatly at odds with informed views of investors, industry experts, and academic economists. This paper examines the substance of the Reserve Bank's recent letter to the SEC and concludes that it reflects a flawed view of the causes of financial crisis and current threats to financial stability. This paper also suggests that the Reserve Bank presidents may have ulterior motives unrelated to legitimate financial stability concerns. Among other things, they may be seeking to invent a new role for themselves as their relevance in the financial system declines when they should instead be focusing their joint advocacy efforts on bank compliance and supervisory issues.

Keywords: money market funds, money market mutual funds, Federal Reserve Bank, floating NAV, commercial paper, financial crisis, ABCP, SIV, financial stability, systemic risk, shadow banking, Federal Reserve, Securities and Exchange Commission, SEC, Dodd-Frank, run on repo, shadow bank, too big to fail