BlackRock CEO Larry Fink's declaration Monday that the company favors the so-called "Liquidity Exchange Bank" means that the concept appears to have unanimous support among the largest money fund managers. We believe this increases the odds that the money fund industry and investors will convince regulators to take this approach and decreases the likelihood of a more radical floating NAV or bank regulatory approach. Fink said on the company's conference call "We believe there's a great need for a liquidity bank. We are in favor of it despite some poor reporting. We've always been in favor of the liquidity bank."
Bloomberg's April 1 article "BlackRock's Fink Opposes Money-Fund Industry Plan", had said Fink "stands alone among the biggest U.S. money-market fund providers in publicly opposing a proposed safety net for the industry that manages $3 trillion for investors.... JPMorgan Chase & Co., Federated Investors Inc., Vanguard Group Inc., Goldman Sachs Group Inc. and four other firms have backed the plan, which was proposed by the industry's trade group last month." The article added, "BlackRock's dissent may make it harder for money funds to head off regulatory changes that could include an end to the stable $1 net asset value that made the funds a popular alternative to bank accounts. Regulators and firms are seeking ways to prevent a repeat of the run on money funds that followed the 2008 collapse of the Reserve Primary Fund."
The Liquidity Exchange Bank plan was originally revealed publicly by Investment Company Institute President & CEO Paul Schott Stevens in a March speech. He said, "ICI has also pursued the challenge of providing a stronger backstop for money market funds in a time of crisis. After it issued its report last March, ICI's Money Market Working Group began to explore additional ideas for providing liquidity for money market funds to meet redemptions when liquidity has dried up in the markets. In part, we have responded to an idea advanced in the Treasury Department's June 2009 white paper on financial regulatory reform, which called for exploring measures to require money market funds 'to obtain access to reliable emergency liquidity facilities from private sources.'"
He continued, "I'm pleased to tell you that we are moving forward rapidly to complete a blueprint for such a liquidity facility. This would be a state-chartered bank or trust company, organized and capitalized by the prime money market fund industry and managed and governed in accordance with applicable banking laws. It would be dedicated to providing additional liquidity to prime money market funds in the event of severe market conditions."
As we wrote in our April Money Fund Intelligence, Crane Data also spoke with ICI General Counsel Karrie McMillan. She told us, "The idea is to have a privately fund facility that would be available to prime money funds in the event that there is another liquidity event like what we saw a few years ago."
The LEB is still under construction, but as currently envisioned it would provide $50 billion in additional redemption liquidity and could provide additional liquidity in a financial crisis by borrowing from the Fed's discount window. It would require participation from and would be available to all prime money funds. It would a 'provide a pool of standby capital' as a 'buffer to prevent the forced sale of securities,' and would be funded by initial equity from managers ($150 million), ongoing commitment fees (2-3 bps), and debt offerings (2.5% of prime fund assets would be invested in LEB deposit notes).
