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Did Liquidity Limits Amplify Money Market Fund Redemptions During the COVID Crisis?

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  • Peter G. Dunne
  • Raffaele Giuliana

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

  • Peter G. Dunne & Raffaele Giuliana, 2026. "Did Liquidity Limits Amplify Money Market Fund Redemptions During the COVID Crisis?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 31(2), pages 2863-2877, April.
    • Handle: RePEc:wly:ijfiec:v:31:y:2026:i:2:p:2863-2877
    DOI: 10.1002/ijfe.70021
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    References listed on IDEAS

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    1. Sergey Chernenko & Adi Sunderam, 2014. "Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1717-1750.
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