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An Evaluation of Money Market Fund Reform Proposals


  • Samuel G Hanson
  • David S Scharfstein
  • Adi Sunderam


U.S. money market mutual funds (MMFs) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the United States. MMFs proved to be a source of considerable instability during the financial crisis of 2007–09, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which are analyzed in this paper. The paper assumes that the main goal of MMF reform is safeguarding global financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. The analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that an MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating net asset value, may be less effective in protecting financial stability. The analysis sheds light on the fundamental tensions inherent in regulating the shadow banking system.

Suggested Citation

  • Samuel G Hanson & David S Scharfstein & Adi Sunderam, 2015. "An Evaluation of Money Market Fund Reform Proposals," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(4), pages 984-1023, November.
  • Handle: RePEc:pal:imfecr:v:63:y:2015:i:4:p:984-1023

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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Money Funds -- The Empire Strikes Back?
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-01-15 18:48:50


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Marco Cipriani & Gabriele La Spada, . "Investors’ appetite for money-like assets: the money market fund industry after the 2014 regulatory reform," Staff Reports, Federal Reserve Bank of New York.
    2. Goldstein, Itay & Jiang, Hao & Ng, David T., 2017. "Investor flows and fragility in corporate bond funds," Journal of Financial Economics, Elsevier, vol. 126(3), pages 592-613.
    3. repec:cpr:ceprdp:14375 is not listed on IDEAS
    4. Baghai, Ramin P. & Giannetti, Mariassunta & 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.
    5. La Spada, Gabriele, 2018. "Competition, reach for yield, and money market funds," Journal of Financial Economics, Elsevier, vol. 129(1), pages 87-110.
    6. Parlatore, Cecilia, 2016. "Fragility in money market funds: Sponsor support and regulation," Journal of Financial Economics, Elsevier, vol. 121(3), pages 595-623.

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