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Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry

Author

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  • Giannetti, Mariassunta
  • Baghai, Ramin
  • Jager, Ivika

Abstract

We exploit a change in regulation of money market funds to investigate how the structure of liabilities impacts financial intermediaries’ asset holdings. We show that following a change in regulation, which has made prime money market funds’ liabilities less money-like, safer funds exited the industry. The remaining funds have increased the riskiness of their portfolios, possibly in response to an increase in the sensitivity of flows to performance. As a result, issuers with lower risk of default have less access to funding from US money market funds. To the best of our knowledge, our paper provides the first evidence in support of theories highlighting that the characteristics of financial intermediaries’ assets and liabilities are jointly determined.

Suggested Citation

  • Giannetti, Mariassunta & Baghai, Ramin & Jager, Ivika, 2018. "Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry," CEPR Discussion Papers 13151, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13151
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    1. La Spada, Gabriele, 2018. "Competition, reach for yield, and money market funds," Journal of Financial Economics, Elsevier, vol. 129(1), pages 87-110.
    2. Hanson, Samuel G. & Shleifer, Andrei & Stein, Jeremy C. & Vishny, Robert W., 2015. "Banks as patient fixed-income investors," Journal of Financial Economics, Elsevier, vol. 117(3), pages 449-469.
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    Cited by:

    1. Allen, Kyle D. & Winters, Drew B., 2020. "Crisis regulations: The unexpected consequences of floating NAV for money market funds," Journal of Banking & Finance, Elsevier, vol. 117(C).

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    More about this item

    Keywords

    Money-ness; Fund exit; Liquidity; Money market funds; Risk taking;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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