The Bank for International Settlements (BIS), an "international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks," writes in its March 2009 BIS Quarterly Review about "US dollar money market funds and non-US banks. The article, which was written by Naohiko Baba, Robert McCauley, and Srichander Ramaswamy, summarizes, "The Lehman Brothers failure stressed global interbank and foreign exchange markets because it led to a run on money market funds, the largest suppliers of dollar funding to non-US banks. Policy stopped the run and replaced private with public funding."

The BIS Quarterly says, "That a loss of confidence in dollar money market funds amplified the financial instability arising from the Lehman Brothers failure in September 2008 is well appreciated. What is less well understood, however, is why the run on these funds coincided with the deterioration in global interbank markets. Similarly unclear is the relationship between policies to stabilise US money markets and those to distribute dollars through cooperating central banks. How great was the need of non-US banks for dollars and how much did they rely on US dollar money market funds How did a safe haven become the critical link between Lehman's failure and the seizing-up of interbank markets? Was the run on money market funds indiscriminate? How did policies to calm the US money market fit with policies to provide dollars to non-US banks?"

The article continues, "In sum, the run on US dollar money market funds after the Lehman failure stressed global interbank markets because the funds bulked so large as suppliers of US dollars to non-US banks. Public policies stopped the run and replaced the reduced private supply of dollars with public funding." The report "reviews European banks' need for US dollars" and "quantifies the role of dollar money market funds as dollar providers." It reviews "how money funds played this role up to August 2008 and then how the Lehman failure undid it" and "reviews policies that responded to the run and associated fund flows."

The data-rich study contains a table of the 15 largest prime money funds and their holdings of European bank debt, a number of tables on asset growth and flows (many using Crane Data numbers), a table of "Asset growth of the largest money market fund managers", and "US institutional money market fund assets and maturity." But it also says, "`The future of the money market fund industry is not clear. Those in the industry tend to take the view that too much should not be made of one fund that tried to shoot the moon. According to them, events have shown that money market funds can survive much stress."

Look for more on this study and on the future of money market funds in our pending March issue of Money Fund Intelligence. (See too, The Austalian/Dow Jones article on the topic, "Treat money market funds like banks".)

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