Money market mutual fund assets plunged, likely due to the April 17 (or 18) income tax payment date. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have decreased by $44 billion, or -1.6%. Over 52 weeks they've increased by $167 billion, or 6.4%. ICI's numbers show the declines concentrated in Government and Institutional funds, though Prime and retail money funds declined too. We review the latest asset totals, and we also quote from a recent speech from Federal Reserve Governor Lael Brainard. (Note: Thanks to those who attended our session or stopped by our booth at this week's New England AFP Annual Conference in Boston! Let us know if you want a copy of Peter Crane's Powerpoint, "Money Funds: Past, Present and Future.")
ICI writes, "Total money market fund assets decreased by $33.35 billion to $2.79 trillion for the week ended Wednesday, April 18, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $28.58 billion and prime funds decreased by $2.31 billion. Tax-exempt money market funds decreased by $2.46 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.208 trillion (79.0% of all money funds), while Total Prime MMFs stand at $455.8 billion (16.3%). Tax Exempt MMFs total $130.0 billion, or 4.7%.
They explain, "Assets of retail money market funds decreased by $4.60 billion to $1.01 trillion. Among retail funds, government money market fund assets decreased by $1.11 billion to $622.43 billion, prime money market fund assets decreased by $1.02 billion to $261.04 billion, and tax-exempt fund assets decreased by $2.47 billion to $123.22 billion." Retail assets account for over a third of total assets, or 36.0%, and Government Retail assets make up 61.8% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds decreased by $28.74 billion to $1.79 trillion. Among institutional funds, government money market fund assets decreased by $27.46 billion to $1.59 trillion, prime money market fund assets decreased by $1.29 billion to $194.72 billion, and tax-exempt fund assets increased by $6 million to $6.72 billion." Institutional assets account for 64.0% of all MMF assets, with Government Inst assets making up 88.7% of all Institutional MMFs.
In other news, Federal Reserve Governor Lael Brainard spoke yesterday on "Safeguarding Financial Resilience through the Cycle" at the Global Finance Forum in Washington. She says, "It is a good moment to take stock of the cyclical position of the economy and the health of the banking system. In many respects, where we are today is the mirror image of where we were just a decade ago.... While this progress is heartening, we cannot afford to be complacent. If we have learned anything from the past, it is that we must be especially vigilant about the health of our financial system in good times, when potential vulnerabilities may be building."
Brainard explains, "While we have made important progress in our regulatory framework, we still have not implemented a few key elements. The list of remaining items is short but important and well anticipated. First, we are close to finalizing the net stable funding ratio, or NSFR. This significant liquidity regulation is important to ensure that large banking firms maintain a stable funding profile over a one-year horizon. It will serve as a natural complement to our existing liquidity coverage ratio, which helps ensure firms can withstand liquidity strains over a 30-day time horizon. And by most estimates, our large complex banking institutions are in a position to meet the expected requirements with little adjustment."
She continues, "Second, we need to finalize Dodd-Frank Act limits on large counterparty exposures. These limits will reduce the chances that outsized exposures, particularly between large financial institutions, could spread financial distress and undermine financial stability as we witnessed during the last financial crisis. Moreover, these large exposure limits will effectively update the traditional bank lending limits that proved useful for well over 100 years for today's challenges, by recognizing the many ways in which banks and their affiliates take on credit exposure beyond directly extending loans."
The Fed Governor tells us, "I also support moving forward with minimum haircuts for securities financing transactions (SFTs) on a marketwide basis to counter the growth of volatile funding structures outside the banking sector. International agreement on a regulatory framework for minimum SFT haircuts was reached by financial regulators in 2015, and it is important to follow through on this work plan. While current market practices in this area may well exhibit much better risk management than pre-crisis, past experience suggests we cannot rely on prudent practices to remain in place as competitive and cyclical pressures build. Regulatory minimum haircuts calibrated to be appropriate through the cycle could help ensure that repo, securities lending, and securities margin lending and related markets do not become a source of instability in periods of financial stress through fire sales and run-type behavior."
She comments, "History and experience show that stable economic growth is aided by strong regulatory buffers that bolster the resilience of our large banking organizations and help reduce the severity of downturns. At a time when cyclical pressures are building, and asset valuations are stretched, we should be calling for large banking organizations to safeguard the capital and liquidity buffers they have built over the past few years.... Although I believe it is too early today to reassess the calibration of existing capital and liquidity buffers because they have yet to be tested through a full economic cycle, I look forward to efforts that are planned in future years in the international standard-setting bodies to assess the framework quantitatively."
Brainard also says, "We continue to assess the overall vulnerabilities in the U.S. financial system to be moderate by historical standards in great measure because post-crisis reforms have strengthened the regulatory and supervisory framework for the largest U.S. banking firms. The crisis revealed a stark weakness in the capital and liquidity positions of many of our large banking organizations that left many of them incapable of dealing with financial stress and necessitated unprecedented government intervention. A primary focus of post-crisis financial reform has been strengthening capital and liquidity buffers at large banking institutions, which has bolstered the safety and soundness of these institutions and reduced systemic risk more broadly."
Finally, she adds, "In terms of liquidity, not only do our largest firms now have the right kind and amount of liquidity calibrated to their funding needs and to their likely run risk in stressed conditions, but they also are required to know where it is at all times and to ensure it is positioned or readily accessible where it is most likely to be needed in resolution. Prior to the crisis, many of the largest firms did not even have a good handle on where their liquidity was positioned. For example, our largest banking firms have increased their holdings of high quality liquid assets from 12 percent of assets in 2011 to 20 percent of assets in 2017, and they have reduced their reliance on short-term wholesale funding from 37 percent of liabilities in 2011 to 25 percent of liabilities in 2017. This, combined with critical reforms to money market funds and other vital short-term funding markets, have reduced the vulnerabilities in the financial system associated with liquidity mismatch and maturity transformation."
