Shadow Insurance? Money Market Fund Investors and Bank Sponsorship

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