FT on Making Money Funds Safer
The Financial Times published an editorial, "How to make US money market funds safer," which tells us, "In the rough and tumble of financial markets, one player's loss is often another’s gain. That is certainly true for US money market funds. Last month, as depositors fretted over the safety of their funds in the banking system, particularly in shaky regional lenders, they shifted their cash into MMFs at a rapid rate, with inflows of roughly $370bn. With First Republic, the San Francisco-based regional lender, teetering, that trend seems set to continue, albeit at a slower pace." It continues, "MMFs form a core part of the shadow banking system -- financial intermediaries that cannot take deposits. As the US Federal Reserve has raised interest rates, the funds have offered investors rates well above those that banks pay. By investing in short-term debt securities, they also allow investors to manage their cash needs while providing day-to-day finance to the economy. Their scale and importance in the plumbing of the financial system is such, however, that they are a key source of risk." The FT adds, "Another risk is that the funds are outcompeting the regional lenders and weakening their profitability further. A third risk is that MMFs have been increasingly parking their cash in the Fed's reverse repo facility, where they can obtain higher and safer returns. This further drains liquidity from the banking system, adding to worries about credit availability.... This is the time, however, for moderate reform to raise resilience in the sector. MMFs should be required to disclose more data to regulators to aid their monitoring of liquidity and redemption vulnerabilities, and raise investor awareness of the risks. Higher liquidity requirements make sense too, though these need to be modest enough not to overly squeeze the funds. Flows into the reverse repo facility need to be closely watched too. With the authorities preparing to set out new rules for the sector, they should keep in mind that overburdening MMFs with onerous restrictions risks harming the financial system in the long run. Indeed, the recent outflows from banks into these funds highlight the shadow banking sector's role as an important safety valve in times of crisis. Oversight of MMFs is a balancing act: do too little and risks to financial stability emerge, but do too much and an essential source of liquidity gets stymied. Regulators need to get it just right."
