Do money market funds create systemic risk?

Video

Post Event Summary
Since a run on the Reserve Primary Fund during the financial crisis in 2008, the Financial Stability Oversight Council has suggested that some money market funds (MMF) threaten the stability of the U.S. financial system and place them—along with other large financial firms—under Federal Reserve supervision and regulation. On Thursday at AEI, Melanie Fein of Fein Law Office presented a paper defending MMFs from the prospect of increased regulation.

In her keynote address, Fein articulated why the transparency, lack of leverage, present regulation and strict liquidity requirements make MMFs substantially safe products in the financial system. Jeffrey Gordon of Columbia University disputed some of the paper's claims, however, emphasizing the two-sided run problem of MMFs that lack first-loss protection.

Ed Greene of Cleary Gottlieb Steen & Hamilton then placed MMFs in the broader context of shadow banking, still noting that unnecessary regulation would significantly harm the market for such funds. Investment Company Suite’s Paul Stevens concluded the discussion by asserting that regulators are perhaps overestimating the risks toward MMFs, which are among the most transparent products in the financial system.
-James Pickens

Event Description
Following the bankruptcy of Lehman Brothers in September 2008, one primary money market fund (MMF) "broke the buck" and set off a run on other similar funds. The U.S. Treasury temporarily insured MMFs to stem redemptions. In January 2010, the SEC changed the regulations governing MMFs to provide for more liquidity and disclosure of the potential risks associated with MMF investments.

Still, recent speeches by Federal Reserve officials have suggested more needs to be done and carried the veiled threat that, if the SEC does not take the necessary actions, the Financial Stability Oversight Council may find that some funds threaten the stability of the U.S. financial system and place them, along with other large financial firms, under Fed supervision and regulation. This discussion will consider whether MMFs require some capital backing and are suitable candidates for SIFI treatment.

Full video will be posted within 24 hours.

 

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Peter J.
Wallison

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