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Preventing runs with fees and gates

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  • Voellmy, Lukas

Abstract

I study whether redemption fees and gates as recently introduced into US and EU money market fund (MMF) regulations achieve their goal of eliminating the first-mover advantage, thereby making MMFs less susceptible to runs. I study both MMFs offering stable net asset value (NAV) shares and MMFs offering floating NAV shares. Conceptually, redemption fees have two roles in eliminating run equilibria: (i) they ensure that redeeming investors internalize the cost of liquidating assets and (ii) they can be used to implement a redistribution among investors that incentivizes investors to remain invested in the MMF when others run. For stable NAVs, both functions of redemption fees are relevant. For floating NAVs, only the redistributive function of fees is relevant since the floating NAV already ensures that redemptions do not impose losses on investors who remain in the MMF. Gates are less versatile than fees and, given that MMFs can charge fees, gates only have a role in preventing runs if there are (regulatory) restrictions on the level of the fee.

Suggested Citation

  • Voellmy, Lukas, 2021. "Preventing runs with fees and gates," Journal of Banking & Finance, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jbfina:v:125:y:2021:i:c:s0378426621000236
    DOI: 10.1016/j.jbankfin.2021.106065
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    Cited by:

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    2. Schilling, Linda, 2023. "Smooth versus Harsh Regulatory Interventions and Policy Equivalence," CEPR Discussion Papers 17996, C.E.P.R. Discussion Papers.
    3. Schilling, Linda, 2024. "Smooth Regulatory Intervention," MPRA Paper 120041, University Library of Munich, Germany.
    4. Panetti, Ettore, 2022. "Banks’ liquidity provision and panic runs with recursive preferences," Finance Research Letters, Elsevier, vol. 47(PA).
    5. Thierry Roncalli, 2021. "Liquidity Stress Testing in Asset Management -- Part 3. Managing the Asset-Liability Liquidity Risk," Papers 2110.01302, arXiv.org.

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    More about this item

    Keywords

    Money market funds; Bank runs; Redemption fees; Gates;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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