Hartley Comments to SEC on PWG
A new comment letter has been posted to the SEC's "Comments on Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report" page. This one, "The Case For Prime Money Market Mutual Fund Liquidity Insurance," was written by Jonathan Hartley (not the FHLB's Jonathan Hartley), a master's student at Harvard's Kennedy School and Visiting Fellow at the Foundation For Research on Equal Opportunity. He writes, "A year after the COVID-19 market meltdown, the first major debate on financial regulation under the Biden administration is shaping up to be about prime-money-market mutual funds. While banks held up well during the pandemic (demonstrating the success of Dodd-Frank capital rules), prime-money-market mutual funds (which invest in short-term government bills and commercial paper) experienced massive redemptions in March 2020. The withdrawals mirrored those during the 2008 financial crisis, despite U.S. money-fund reforms that went into effect in 2016. As with the bank runs of the Great Depression, money-market funds tend to see major redemptions when their net asset values (NAV) 'break the buck' (falling below $1) and investors race to pull their money to avoid taking a hit. In fact, there is a growing consensus that not only did the previous money-market-fund reforms implemented in 2016 fail to prevent runs but they may have made the money-market runs worse by requiring fund companies to impose gates and fees on investors when a money fund's assets decline by 30 percent. The reforms also attempted to get investors more comfortable with small losses by creating a 'floating NAV' (extending NAV quotes to four decimal places instead of two to allow investors to see small fluctuations in returns), but that seems to have had no effect on preventing runs. Now, prime-money funds (which act very much like bank-deposit accounts for institutional cash) face the possibility of being banned altogether." The letter adds, "Of the reforms under consideration, money-fund liquidity insurance is the simplest path, with operational and regulatory ease of allowing prime money funds to function largely the same way they do today but simply requiring them to pay small insurance premiums into an insurance fund. Some may argue that the insurance premiums would make prime money funds less viable. It would be essential to find the happy medium that's sufficiently small not to be disruptive while still paying for potential liquidity insurance needs during times of financial stress. Others might also argue that FDIC-like insurance might create moral hazard, that is, To what degree are you incentivizing money-market funds to invest in riskier securities by insuring losses? I would argue that if there are any moral-hazard risks, they already exist in the sense that the Fed money-market fund-liquidity programs of 2008 and 2020 are already providing de facto insurance. Despite the growth of administrative bloat in Washington over the past hundred years, the FDIC has been one of the most effective regulatory agencies, preventing bank runs that were all too common before the Banking Act of 1933. Likewise, a money-fund insurance program could foster more financial stability by preventing money-fund runs (which seem to have become a decadal event) while preserving an effective vehicle to provide short-term lending that supports economic growth." (This comment also appeared as "Treat Money-Market Funds Like Banks" in the National Review recently.)
