Today's issue of American Banker contains yet another editorial arguing against regulating money funds as banks, a comment piece entitled, "Money Market Funds Have No Place on Banking Sheets". The comment was written by Arnold & Porter LLP partner and former comptroller of the currency John D. Hawke Jr. and David F. Freeman Jr..
The piece describes briefly describes money funds and their history and says, "Proposals for more regulation of money market funds have come from several sources. Both the Federal Reserve Board and the Treasury Department have stressed the importance of measured enhancements to regulation while recognizing the role the funds play.... The SEC and ICI approaches would strengthen the money fund industry while preserving the utility and desirability of these funds."
Hawke and Freeman continue, But a very bad idea has been presented by the Group of 30, a private organization of academics, industry executives and retired central bank officials from around the world." In January it issued a report that suggested money market funds be forced either to give up their stable net asset value and transactional and withdrawal features -- in essence, to become fluctuating-value short-term bond funds -- or to become special-purpose banks, subject to regulation and supervision by banking regulators, with capital and reserve requirements and access to loans from the central bank. This proposal would bring about the end of money market funds as we know them."
They say in American Banker, "The current leaders of the Fed, the Treasury and the SEC have been cool to this proposal, and with good reason -- it would needlessly deprive investors, the credit markets and the banking system of an extremely useful and minimally risky product.... Money market funds have been the cash management vehicle of choice for individuals and large and small businesses alike for years. Many have chosen the funds because they are seen as more convenient and a better investment than other options."
Finally, the editorial says, "Moving the funds into the regulated banking system would present major problems. Bank balance sheets, already under severe capital pressure, do not have the capacity to take on an additional $3.9 trillion of deposits.... In addition, removing these products as providers of funding in the credit markets would deprive both business and governmental borrowers of an extremely important source of short-term credit.... Money funds have become a ready source of short-term credit to major borrowers. If these funds were removed as a source of credit and liquidity, the shock to our financial system and our economy would be grave. This is not the time for such a draconian change.... Banks as a whole, despite FDIC insurance, are not safer than money market funds -- they are far riskier."
