Money Market Funds in Europe and Financial Stability

Abstract

June 2012 Money Market Funds in Europe and Financial StabilityMMFs have long been subject to securities market regulations, the existing frameworks may need to be complemented and revised in order to address broader concerns related to financial stability. 4.As regards the next steps, the paper emphasises that the various policy options will have to be thoroughly assessed and carefully considered in the context of their potential impact on financial stability and market functioning. Several factors will have to be taken into account, such as moral hazard, competition, the impact on financing, regulatory obstacles and implementation challenges (particularly in a low interest rate environment), as well as the need for global consistency. 5.With regard to the ESRB, it could conduct further analysis on the role of MMFs in providing finance to the economy, the differences in MMF profiles and possible policy recommendations to strengthen their robustness, as well as the related macroprudential implications. This analysis could also serve as an input into the European Commission's consultation on shadow banking, which also considers the regulation of money market funds.

Is the EU Money Market Fund Regulation Fit for Purpose? Lessons from the COVID-19 Turmoil

“…First, our paper is related to the literature on payoff complementarities and run risk in mutual funds and MMFs in particular. A key vulnerability of MMFs arises from liquidity and maturity transformation (Ansidei et al (2012)). Moreover, MMFs may engage in risk-taking behaviour triggered by investors which reward funds that offer higher nominal returns by increasing the amounts invested in those funds (Chernenko and Sunderam (2014), Kacperczyk and Schnabl (2013) Therefore, MMFs holding a larger share of risky assets tend to experience higher outflows during crises periods than other MMFs that hold a less risky portfolio (Baba et al (2009), Jank and Wedow (2015), Strahan and Tanyeri (2015)).…”