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August 11, 2022

Money Market Funds: A Bank-Like Product Without Bank-Like Regulations or Protections Needlessly Creates Systemic Risks

WASHINGTON, D.C.— Phillip Basil, Director of Banking Policy at Better Markets, issued the following statement in connection with today’s release of Better Markets’ report on money market funds (MMFs). The report is the second in a series on the shadow banking sector and the serious risks it poses to the U.S. financial system. You can find the first report in the series, which provides an overview of shadow banking here.

“Money Market Funds, sold as an alternative to traditional bank checking or savings deposit accounts, play a prominent role in the shadow banking system. Although little more than demand deposit bank accounts suggesting dollar-for-dollar guarantees, they are not subject to similar regulations as banks and, therefore, do not have either insurance or an adequate financial cushion to withstand market stresses.  That’s why the Fed and the American public have had to bail out the MMF industry twice, first during the 2008 Crash when the industry was about $3 trillion in size and then again in 2020 pandemic when the industry was $4.5 trillion in size. It is long past time that MMFs were properly regulated and sufficiently resilient to market stress that taxpayers never again have to bail them out.

“Part of the proliferating problems with MMFs arise from their extensive interconnections with vital parts of the financial system and, therefore, the contagion they can quickly precipitate.  For example, MMFs provide a significant amount of funding to the short-term funding markets like commercial paper and repo markets that are used by banks, other financial institutions, and larger corporations for their day-to-day operational needs. A lack of sufficient regulations for the MMF industry has repeatedly led to panic among investors and massive runs in 2008 and 2020 that resulted in near-crippling turmoil in those markets, which threatened to shut down the financial system and economy. Large banks in particular face pressure on multiple fronts from runs on MMFs – from turmoil in the short-term funding markets, on which they heavily rely, and from corporate customers in need of borrowing.  Thus, MMFs are the proverbial “canary in the coalmine” whereby MMF runs quickly transmit into the short-term money markets and then into the core of the banking and nonbank financial systems, pushing them to the brink of collapse and precipitating bailouts.

“Another channel of impact to the financial system, and another source of pressure for large banks, is through the sponsorship of MMFs. In the U.S., MMFs that are sponsored by banks hold about 45% of the industry’s assets, with the remainder held by those sponsored by large investment management companies. These relationships create exposures, and even losses, to the sponsoring bank in times of stress when those sponsoring banks deplete their capital when they inject it into their MMFs to keep them solvent and prevent them from failing.

“To properly regulate the MMF industry and protect investors, the financial system, and taxpayers from future crises, the SEC must finalize its rule to include both meaningful minimum capital requirements across all MMFs and requiring share values to vary (i.e., float) for all MMF types. Additionally, the SEC and the federal banking regulators should put in place capital requirements for potential exposures due to banks’ sponsorship of MMFs.”

You can find the report here or at the button below.

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Better Markets is a non-profit, non-partisan, and independent organization founded to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

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