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Explaining the Life Cycle of Bank-Sponsored Money Market Funds: An Application of the Regulatory Dialectic

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Abstract

In this paper, we present empirical evidence of the regulatory dialectic in the prime institutional money market fund (PI-MMF) industry. The “regulatory dialectic”, developed by Kane (1977, 1981), describes how banks and regulators react to each other. For decades, a cap on commercial deposit interest rates fueled dramatic growth in bank-sponsored PI-MMFs as a form of shadow banking. During the growth period, banks with more commercial deposits were more likely to enter the PI-MMF industry in an effort to keep their commercial customers in affiliated subsidiaries. However, the 2008 crisis and subsequent regulatory changes halted the rapid growth of PI-MMFs. In the post-crisis regulatory regime, bank-sponsored funds were more likely to exit the industry than nonbank-sponsored funds. Simultaneously, the industry shifted from PI-MMFs to government institutional MMFs as substitute products. We conjecture that the collapse of the PI-MMF can lead further to the emergence of substitute products, such as stablecoins as part of the continuing dialectical process.

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  • Stefan Jacewitz & Jonathan Pogach & Haluk Unal & Chengjun Wu, 2024. "Explaining the Life Cycle of Bank-Sponsored Money Market Funds: An Application of the Regulatory Dialectic," Research Working Paper RWP 24-01, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:97778
    DOI: 10.18651/RWP2024-01
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    References listed on IDEAS

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    6. Vladimir Yankov, 2020. "The Liquidity Coverage Ratio and Corporate Liquidity Management," FEDS Notes 2020-02-26, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    bank; bank holding company; bank run; financial crisis; liquidity risk; money market funds; systemic financial risk; too big to fail;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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