Shadow Insurance? Money Market Fund Investors and Bank Sponsorship

55 Pages Posted: 2 Sep 2021

See all articles by FRB of Kansas City Submitter

FRB of Kansas City Submitter

Federal Reserve Bank of Kansas City

Stefan Jacewitz

Federal Reserve Bank of Kansas City

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Chengjun Wu

University of Maryland - Robert H. Smith School of Business

Date Written: August 2021

Abstract

We argue that bank holding companies (BHCs) extend shadow insurance to the prime institutional
money market funds (PI-MMFs) they sponsor and that PI-MMFs price this shadow insurance by
charging investors significantly higher expense ratios and paying lower net yields. We provide evidence that after September 2008, expense ratios at BHC-sponsored PI-MMFs increased more than at nonBHC-sponsored PI-MMFs. Despite higher expense ratios, BHC-sponsored PI-MMFs did not experience larger redemptions than non-BHC-sponsored PI-MMFs. In addition, we show that expense ratios increased with BHCs’ financial strength and the likelihood of their support; however, this expense ratio differential disappeared after the 2016 MMF reform.

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

Submitter, FRB of Kansas City and Jacewitz, Stefan and Unal, Haluk and Wu, Chengjun, Shadow Insurance? Money Market Fund Investors and Bank Sponsorship (August 2021). Available at SSRN: https://ssrn.com/abstract=3915114 or http://dx.doi.org/10.2139/ssrn.3915114

FRB of Kansas City Submitter (Contact Author)

Federal Reserve Bank of Kansas City

1 Memorial Drive
Kansas City, MO 64198
United States

Stefan Jacewitz

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
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)

Chengjun Wu

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

College Park, MD 20742-1815
United States

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