Shadow Insurance? Money Market Fund Investors and Bank Sponsorship

38 Pages Posted: 19 Jun 2020 Last revised: 22 Jun 2020

See all articles by Stefan Jacewitz

Stefan Jacewitz

FDIC, Division of Insurance and Research

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Date Written: June 1, 2020

Abstract

In this paper, we argue that bank-sponsored prime institutional money market funds (PI-MMFs) are different from non-bank-sponsored PI-MMFs. This difference can arise because the sponsoring bank holding companies (BHCs) can extend shadow insurance to ailing affiliated MMFs. We hypothesize that PI-MMFs price this shadow insurance through higher expense ratios. Indeed, after September 2008 when industry risk increased, expense ratios were seven basis points higher than those of non-BHC-sponsored MMFs. This increase is of similar size to the average deposit insurance premium charged by the FDIC in 2008. We also show, despite higher expense ratios, the redemptions in BHC sponsored MMFs were lower in contrast to expectations of prior literature.

Keywords: bank, bank holding company, bank run, financial crisis, liquidity risk, money market fund, systemic risk, too big to fail

JEL Classification: G2, G21, G23, G28, H12, H81.

Suggested Citation

Jacewitz, Stefan and Unal, Haluk, Shadow Insurance? Money Market Fund Investors and Bank Sponsorship (June 1, 2020). FDIC Center for Financial Research Paper No. 2020-03, Available at SSRN: https://ssrn.com/abstract=3628577 or http://dx.doi.org/10.2139/ssrn.3628577

Stefan Jacewitz (Contact Author)

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States

Haluk Unal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

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