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US dollar funding markets during the Covid-19 crisis - the money market fund turmoil

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  • Egemen Eren
  • Andreas Schrimpf
  • Vladyslav Sushko

Abstract

Short-term dollar funding markets experienced severe dislocations in mid-March 2020, with funding diverted from unsecured funding markets as investors withdrew and switched to secured funding markets and government MMFs. Outflows from US prime MMFs led to a loss of funding for banks and a significant shortening of funding maturities; this precipitated spikes in indicators of bank funding costs, such as the LIBOR-OIS spread, despite banks not being at the epicentre of the liquidity squeeze. The turmoil highlights broader lessons for MMF regulation, the role of non-banks for monetary policy implementation, and the role of the central bank during stress.

Suggested Citation

  • Egemen Eren & Andreas Schrimpf & Vladyslav Sushko, 2020. "US dollar funding markets during the Covid-19 crisis - the money market fund turmoil," BIS Bulletins 14, Bank for International Settlements.
    • Handle: RePEc:bis:bisblt:14
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    References listed on IDEAS

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    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Iñaki Aldasoro & Ingo Fender & Bryan Hardy & Nikola Tarashev, 2020. "Effects of Covid-19 on the banking sector: the market's assessment," BIS Bulletins 12, Bank for International Settlements.
    3. Egemen Eren & Andreas Schrimpf & Vladyslav Sushko, 2020. "US dollar funding markets during the Covid-19 crisis - the international dimension," BIS Bulletins 15, Bank for International Settlements.
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    Cited by:

    1. David Aikman & Daniel Beale & Adam Brinley-Codd & Anne-Caroline Hüser & Giovanni Covi & Caterina Lepore, 2023. "Macro-Prudential Stress Test Models: A Survey," IMF Working Papers 2023/173, International Monetary Fund.
    2. Inaki Aldasoro & Wenqian Huang & Esti Kemp, 2020. "Cross-border links between banks and non-bank financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
    3. Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2023. "Stress relief? Funding structures and resilience to the covid shock," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 47-81.
    4. Ross Levine & Chen Lin & Mingzhu Tai & Wensi Xie, 2021. "How Did Depositors Respond to COVID-19? [A crisis of banks as liquidity providers]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5438-5473.
    5. Aldasoro, Iñaki & Ehlers, Torsten & Eren, Egemen, 2022. "Global banks, dollar funding, and regulation," Journal of International Economics, Elsevier, vol. 137(C).
    6. Ivan, Miruna-Daniela & Banti, Chiara & Kellard, Neil, 2022. "Prime money market funds regulation, global liquidity, and the crude oil market," Journal of International Money and Finance, Elsevier, vol. 127(C).
    7. Egemen Eren & Andreas Schrimpf & Vladyslav Sushko, 2020. "US dollar funding markets during the Covid-19 crisis - the international dimension," BIS Bulletins 15, Bank for International Settlements.
    8. Cesa-Bianchi, Ambrogio & Eguren-Martin, Fernando, 2021. "Dash for dollars," Bank of England working papers 932, Bank of England.
    9. Maurizio Trapanese, 2021. "The economics of non-bank financial intermediation: why do we need to fill the regulation gap?," Questioni di Economia e Finanza (Occasional Papers) 625, Bank of Italy, Economic Research and International Relations Area.
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    11. Fernando Avalos & Dora Xia, 2021. "Investor size, liquidity and prime money market fund stress," BIS Quarterly Review, Bank for International Settlements, March.
    12. O'Donnell, Niall & Shannon, Darren & Sheehan, Barry, 2023. "A vaccine for volatility? An empirical analysis of global stock markets and the impact of the COVID-19 vaccine," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    13. Enrique Esteban García-Escudero & Elisa J. Sánchez Pérez, 2020. "Central bank currency swap lines," Occasional Papers 2025, Banco de España.
    14. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard, 2021. "How does the repo market behave under stress? Evidence from the Covid-19 crisis," Bank of England working papers 910, Bank of England, revised 18 Jun 2021.
    15. Jean Barth l my & Paul Gardin & Benoit Nguyen, 2023. "Stablecoins and the Financing of the Real Economy," Working papers 908, Banque de France.
    16. Voellmy, Lukas, 2021. "Preventing runs with fees and gates," Journal of Banking & Finance, Elsevier, vol. 125(C).
    17. Indriawan, Ivan & Jiao, Feng & Tse, Yiuman, 2022. "Price discovery between forward-looking SOFR and LIBOR," Finance Research Letters, Elsevier, vol. 47(PB).
    18. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard Anna Maria, 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," Journal of Financial Stability, Elsevier, vol. 70(C).
    19. Gökçer Özgür, 2021. "Shadow banking and financial intermediation," Metroeconomica, Wiley Blackwell, vol. 72(4), pages 731-757, November.
    20. John Caramichael & Gordon Y. Liao, 2022. "Stablecoins: Growth Potential and Impact on Banking," International Finance Discussion Papers 1334, Board of Governors of the Federal Reserve System (U.S.).

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