More OFR 2021 Annual Report
As we wrote in our Nov. 18 News, "Treasury's OFR Posts Annual Report, Money Funds, Repo Among Risks," the "OFR 2021 Annual Report to Congress" analyzes threats to the financial stability of the U.S. and contains several sections relating to money market funds. Today, we quote two more sections that weren't included in our original coverage. The first is a sidebar discussing, "Sponsor Support to Money Market Funds." It says, "`Sponsors can help prevent money market funds from letting the net asset value of their shares drop below $1 and mitigate potential spillovers to affiliate funds and short-term funding markets more broadly. Both Moody's Investors Service and the SEC have identified several events over the years where some fund sponsors chose to provide support or take other measures to maintain either price stability or share liquidity.... The SEC data show that some sponsors' support extends beyond prime funds to government and municipal money market funds." It continues, "Voluntary support over several decades may have lessened investors' perception of the risk in money market funds; however, uncertainty about the availability of sponsor support has fueled runs. The implicit support connects the health of a sponsor to the stability of a fund's net asset value; however, the sponsor's ability to provide support has not been a focal point for regulators." Another section comments, "From January 2020 to July 2020, bank deposits rose by $2.3 trillion, while reserves grew by $1.3 trillion, mostly for the largest banks. Money also moved into alternative types of deposits, such as money market funds, and rose to $1 trillion over the same period before decreasing gradually. The increase in bank deposits compounded the negative effect of declining interest rates on banks' net interest margins.... But after March 2020, spreads between rates on deposits and rates on other short-term investments narrowed. The flow of deposits caused banks' net interest margins to fall from 3.28% at the end of 2020 to 2.56% at the end of the first quarter of 2021."
