The minimum balance at risk: a proposal to mitigate the systemic risks posed by money market funds
AbstractThis paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor's recent balances, called the "minimum balance at risk" (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions would subordinate a portion of an investor's MBR, creating a disincentive to redeem if the fund is likely to have losses. In normal times, when the risk of MMF losses is remote, subordination would have little effect on incentives. We use empirical evidence, including new data on MMF losses from the U.S. Treasury and the Securities and Exchange Commission, to calibrate an MBR rule that would reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 564.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Patrick E. McCabe & Marco Cipriani & Michael Holscher & Antoine Martin, 2013. "The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 211-278.
- Patrick E. McCabe & Marco Cipriani & Michael Holscher & Antoine Martin, 2012. "The minimum balance at risk: a proposal to mitigate the systemic risks posed by money market funds," Finance and Economics Discussion Series 2012-47, Board of Governors of the Federal Reserve System (U.S.).
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jonathan Witmer, 2012. "Does the Buck Stop Here? A Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices," Working Papers 12-25, Bank of Canada.
- Lyon, Andrew B, 1984. " Money Market Funds and Shareholder Dilution," Journal of Finance, American Finance Association, vol. 39(4), pages 1011-20, September.
- Steffanie A. Brady & Ken E. Anadu & Nathaniel R. Cooper, 2012. "The stability of prime money market mutual funds: sponsor support from 2007 to 2011," Risk and Policy Analysis Unit Working Paper RPA 12-3, Federal Reserve Bank of Boston.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Regulating Money Market Mutual Funds: An Update
by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2014-07-28 12:27:36
- Bengtsson, E., 2013. "Fund Management and Systemic Risk - Lessons from the Global Financial Crisis," CITYPERC Working Paper Series 2013-06, Department of International Politics, City University London.
- Manmohan Singh, 2012. "Puts in the Shadow," IMF Working Papers 12/229, International Monetary Fund.
- Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
- Huberto M. Ennis, 2012. "Some theoretical considerations regarding net asset values for money market funds," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 231-254.
- Marco Cipriani & Antoine Martin & Bruno M. Parigi, 2013. "Money market funds intermediation, bank instability, and contagion," Staff Reports 599, Federal Reserve Bank of New York.
- Tobias Adrian Author-Name: Adam B. Ashcraft, 2012.
"shadow banking: a review of the literature,"
The New Palgrave Dictionary of Economics,
- Eisenbach, Thomas M. & Keister, Todd & McAndrews, James J. & Yorulmazer, Tanju, 2014. "Stability of funding models: an analytical framework," Economic Policy Review, Federal Reserve Bank of New York, issue Feb, pages 29-47.
- Adrian, Tobias, 2014. "Financial stability policies for shadow banking," Staff Reports 664, Federal Reserve Bank of New York.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber).
If references are entirely missing, you can add them using this form.