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The minimum balance at risk: a proposal to mitigate the systemic risks posed by money market funds


  • Patrick E. McCabe
  • Marco Cipriani
  • Michael Holscher
  • Antoine Martin


This 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.

Suggested Citation

  • 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," Staff Reports 564, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:564

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    References listed on IDEAS

    1. Lyon, Andrew B, 1984. " Money Market Funds and Shareholder Dilution," Journal of Finance, American Finance Association, vol. 39(4), pages 1011-1020, September.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Regulating Money Market Mutual Funds: An Update
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2014-07-28 17:27:36


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    Cited by:

    1. Marco Cipriani & Antoine Martin & Bruno Parigi, 2013. "Money market funds intermediation, bank instability, and contagion," Staff Reports 599, Federal Reserve Bank of New York.
    2. Tobias Adrian & Adam B. Ashcraft, 2012. "shadow banking: a review of the literature," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    3. 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.
    4. 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.
    5. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
    6. Manmohan Singh, 2012. "Puts in the Shadow," IMF Working Papers 12/229, International Monetary Fund.
    7. Adrian, Tobias, 2014. "Financial stability policies for shadow banking," Staff Reports 664, Federal Reserve Bank of New York.
    8. Gallagher, Emily & Schmidt, Lawrence & Timmermann, Allan G & Wermers, Russ, 2017. "Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing during the 2011-12 Eurozone Crisis," CEPR Discussion Papers 11895, C.E.P.R. Discussion Papers.
    9. 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.

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    Money market funds ; Human behavior ; Investments ; Financial crises ; Systemic risk;

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