Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry
55 Pages Posted: 28 Dec 2017 Last revised: 21 May 2019
Date Written: May 19, 2019
We exploit a change in regulation of money market funds to investigate how the structure of liabilities affects financial intermediaries’ asset holdings. We show that following a change in regulation, which made prime money market funds’ liabilities less money-like, safer funds exited the industry. The remaining funds increased the riskiness of their portfolios, possibly in response to an increase in the sensitivity of flows to performance. As a result, issuers with lower risk of default have less access to funding from US money market funds. These findings support theories highlighting that in the absence of government interventions, the private sector may be unable to create liquid assets.
Keywords: Money-ness; Liquidity; Money market funds; Risk taking; Fund exit; Regulation
JEL Classification: G1; G28
Suggested Citation: Suggested Citation