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Do redemptions increase as money market funds approach regulatory liquidity thresholds?

Author

Listed:
  • Dunne, Peter G.

    (Central Bank of Ireland)

  • Giuliana, Raffaele

    (Central Bank of Ireland)

Abstract

Regulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress.

Suggested Citation

  • Dunne, Peter G. & Giuliana, Raffaele, 2022. "Do redemptions increase as money market funds approach regulatory liquidity thresholds?," Research Technical Papers 2/RT/22, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:2/rt/22
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/do-redemptions-increase-as-money-market-funds-approach-regulatory-liquidity-thresholds.pdf?sfvrsn=5
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    Cited by:

    1. Dunne, Peter G. & Giuliana, Raffaele, 2022. "Did Public Debt Assets Improve the Resilience of Money Market Funds during the COVID-19 Crisis?," Financial Stability Notes 5/FS/22, Central Bank of Ireland.

    More about this item

    Keywords

    Money market funds; Liquidity limits;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • F30 - International Economics - - International Finance - - - General

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