More Nutty Professors: SEC Comment
In just the second real posting to the SEC's "Comments on Money Market Fund Reform" page, Professors Stephen Cecchetti of Brandeis International Business School and Kermit Schoenholtz of NYU's Stern School of Business post yet another wacky academic response to the SEC. They write, "Thank you for the opportunity to comment on the SEC's proposed Money Market Fund Reforms. Below is a revised version of comments that previously appeared on our blog at: https://www.moneyandbanking.com/commentary/2022/1/28/sec-money-market-fund-reform-proposals-fall-far-short-again. In announcing publication of the SEC's most recent proposed amendments to the rules governing money market funds, Chair Gary Gensler said: [H]ere we are again. `The events of March 2020 suggest that more can be done to improve the resiliency of money market funds.... This is about systemic risk. Those of us at the SEC have an obligation to the public to once again come back and see if we can shore up this system a bit more.' We couldn't agree more. As the principal regulator of U.S. money market funds (MMFs), the SEC has a duty to end the market distortions and moral hazard that repeated public rescues create. There have been two MMF bailouts, so far. The first came at the height of the Great Financial Crisis of 2008, while the second followed in the March 2020 COVID crisis. While the Treasury provided guarantees only once, the Federal Reserve offered emergency liquidity assistance both times." The professors speculate, "These repeated government interventions encourage MMF managers to behave in ways that make future financial crises more likely. In effect, the authorities are subsidizing liquidity even when there is no direct cost to taxpayers. Moreover, there is no credible way for the Fed to promise not to intervene should a systemic disruption again loom in short-term funding markets. Indeed, Paul Tucker suggests requiring 'the issuers of assets treated as safe, regardless of their legal form, to have access to the central bank's discount window.' The only realistic means to end the subsidies created by the implicit promise of future bailouts is to force MMFs to be far more resilient than they are today." The letter continues, "Not surprisingly, everyone knows that MMF regulation needs reform. In December 2020, the President's Working Group on Financial Markets (PWG) proposed a set of possible MMF reforms. The SEC then sought public comments on this list of proposals. Last June, the Hutchins Center-Chicago Booth Task Force on Financial Stability's proposed reforms included several aimed at MMFs. And, a few months ago, the Financial Stability Board released its own proposals for strengthening the global MMF industry. Against this background, the SEC's December 2021 reform proposals are seriously disappointing. As SEC Chair Gensler suggests, they probably 'shore up this system a bit more.'" They add, "We would go much farther. The proposals are woefully inadequate on several fronts: Ignoring the functional equivalence between banks and MMFs, and without providing a quantitative assessment of costs and benefits, the SEC rejects a role for capital requirements; In calibrating the need for additional MMF liquidity, the SEC implicitly assumes the continued presence of a Fed liquidity backstop; The SEC misses the opportunity to require that MMF stress tests (which have been compulsory for over a decade) meet fundamental principles of transparency, severity and flexibility; [and] Even the SEC's most promising proposal -- to require swing pricing for selected MMFs -- is operationally difficult to implement, so (like most useful reforms), it already faces strong resistance from the industry. In the remainder of this letter, we start with basic facts about the scale and mix of MMFs today. We then describe the SEC's proposals, before focusing on their key shortcomings. We hope that the public comments that the SEC receives will motivate it, at the very least, to conduct a serious quantitative assessment of introducing capital requirements for the most vulnerable MMFs, to re-assess the scale of additional liquid assets needed for MMF resilience in the absence of a Fed backstop, and to propose ways to enhance the effectiveness and utility of MMF stress tests."
