A statement entitled, "Sen. Toomey Criticizes FSOC Recommendations On Money Market Funds was released by Senator Pat Toomey's office last week. The release says, "U.S. Senator Pat Toomey (R-Pa.) criticized the proposed money market fund regulations released by the Financial Stability Oversight Council (FSOC) today." Toomey says, "FSOC's proposed regulations are a mistake, just as they were when SEC Chairwoman Mary Schapiro proposed them. Some regulators mistakenly believe that it is their responsibility to make it impossible for any money market fund to 'break the buck.' But it should not be the goal of government regulators to overregulate for the sake of trying to prevent any and all risks. Regulation should instead focus on limiting systemic risk and providing adequate disclosure to investors, while allowing individual investors to make their own choices about where to invest their money and the risk they want to assume."
He explains, "Furthermore, money market funds offer investors and borrowers a stable and highly liquid financial instrument that plays an important role in our economic system. Money market funds play a critical role in meeting the short-term capital needs of American businesses, from small manufacturers to large corporations. Also, many households in Pennsylvania and across the country use these funds to earn a modest return on their money. The proposed regulations would significantly shrink the industry and would result in less borrowing, less economic growth, less investment options for households, and ultimately fewer jobs."
Toomey adds, "I urge FSOC to follow the SEC's bipartisan lead in eschewing these proposed regulations. The SEC has overseen the regulation of money market funds for four decades, and it understands the product best. I also urge the Senate Banking Committee to convene a hearing to review the cost-benefit of these proposals before moving forward. I look forward to questioning Secretary Geithner, Chairman Bernanke, Chairwoman Schapiro and other members of FSOC on whether these fundamental changes are in the best interest of investors and the economy as a whole."
The release tells us, "Sen. Toomey has been at the forefront of the debate over the new regulations, joining with Sens. Michael Bennet (D-Colo.), Mike Crapo (R-Idaho), Mark Kirk (R-Ill.), Bob Menendez (D-N.J.) and Jon Tester (D-Mont.) to send a bipartisan letter to SEC Chairwoman Mary Schapiro urging caution in moving forward with the proposed regulations. The senator also met with SEC commissioners, arguing that the money market fund industry is a stable and important financial instrument that has thrived for decades."
In other news, the Investment Company Institute posted a new "Viewpoint" piece last week entitled, "Do U.S. Banks Rely Heavily on Money Market Funds? No." ICI Economists Sean Collins and Chris Plantier write, "Money market funds provide important short-term funding for the U.S. economy: these funds hold a total of $2.5 trillion in Treasury and agency securities, repurchase agreements, and other financial instruments. In part, money market funds provide funding to the U.S. economy indirectly by providing funding to banks, both those domiciled in the U.S. and in Europe. These banks in turn may make loans to borrowers who need dollars."
They explain, "The extent to which money market funds provide funding to banks has become a key topic in the debate about money market funds and systemic risks to the financial system. Experts have offered widely varying estimates on this issue, based on different approaches. In this post, we'll take a closer look at two approaches, focusing on U.S. banks."
ICI says, "Some observers estimate that money market funds represent a substantial source of U.S. bank funding -- on the order of 25 percent.... It is unclear, however, that the first approach can meaningfully add to the debate about money market funds and systemic risks to the financial system. The reason is that U.S. banks are not particularly dependent on wholesale dollar funding. U.S. banks obtain funding in a number of other important ways, notably from a large base of retail deposits. Broadening U.S. banks' funding base to include all of their liabilities -- commercial paper, certificates of deposit, repurchase agreements, federal funds, demand deposits, capital, small time and savings accounts, and other miscellaneous liabilities -- we calculate that money market funds contributed just 2.1 percent to U.S. banks' total funding. In other words, money market funds' holdings of bank instruments made up 2.1 percent of banks' total liabilities."
Finally, they add, "Money market funds did provide more than $900 billion in short-term dollar financing to foreign banks in June 2012 -- a considerable amount, but only a small percentage of the total size of foreign banks. This funding supports lending that benefits the U.S. economy. For example, more than half of the primary dealers in U.S. Treasury debt auctions are foreign banks, many of which rely on money market fund financing to help them purchase U.S. government debt. Moreover, large global banks -- including European ones -- play a vital role in financing U.S. exports, traditionally a key priority for the U.S. government. Global banks also help in providing and structuring financing for U.S. state and local governments. It is worth keeping these benefits in mind when discussing the impact of further money market fund reforms."
Note: ICI's Sean Collins will join Crane Data's Peter Crane Monday, November 19, in Frankfurt to speak on the "State of the U.S. Money Fund Industry (and its implications for Europe)" at the European Money Fund Summit.
