Shadow Insurance? Money Market Fund Investors and Bank Sponsorship

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.