ICI Critiques IMF GFSR Analysis
ICI economists published the Viewpoint "IMF Analysis Ignores 2010 Money Market Fund Reforms and Exaggerates Run Risk", which says, "The Securities and Exchange Commission's comprehensive 2010 reforms for money market funds are a proven success. As ICI research has shown, the reforms strengthened the funds and enhanced financial stability. Unfortunately, this success continues to be overlooked or ignored by regulators and academics who persist in raising alarm that money market funds are prone to destabilizing runs. For example, the International Monetary Fund's recent Global Financial Stability Report speculates that "another run on MMMFs [money market mutual funds] may occur if downside credit risks materialize or securities lending suddenly halts, fueling investors' fear of MMMFs 'breaking the buck' (that is, failing to maintain the expected stable net asset value)." The IMF states that "an outright run would be undesirable and could have systemic consequences if the funding that these institutions provide to banks -- directly and through overnight securities lending -- dries up." The IMF's analysis, however, displays a surprising lack of understanding of the laws governing, and institutional details surrounding, money market funds. The IMF's analysis does not once mention the SEC's 2010 reforms to money market funds. The IMF's analysis invites the reader to assume that money market funds use leverage (they do not) and that they can boost their yields by adding credit risk as desired (in fact, money market fund credit risks are highly constrained by SEC rules). The IMF suggests that money market funds engage in securities lending (they don't).... In this blog post, we fill in gaps in the IMF analysis and discuss how the application of bank-like prudential reforms to money market funds could increase risks to financial stability -- just the opposite of the IMF's claims."
