Financial regulators are finally admitting money market reforms put in place during the last crisis are insufficient to prevent runs on America’s non-Treasury money market funds. Part of the problem here is that investors bail at the first whiff of trouble. There just isn’t enough return offered in money markets to take the risk. Ultra-low interest rates are partly to blame for that.
Reforms are likely to continue to fail unless the government requires an FDIC insurance guarantee for money funds. That’s a bad idea if you favor free markets, but less bad than the alternative. What’s the alternative? Another government bailout of money market funds during the next economic crisis. At least the government can collect an insurance premium if they make the guarantee explicit.
The FT has more:
A group of powerful financial regulators have called for sweeping reforms to US money market funds after the $4.9tn industry showed signs of severe strain during the market turmoil in March.
A coalition that includes the heads of the Treasury department, Federal Reserve, Securities and Exchange Commission and the Commodity Futures Trading Commission issued a joint report on Tuesday outlining a set of policy options to improve not only the resilience of money market funds, but also short-term funding markets more broadly.
In March, massive outflows in prime money market funds — which invest in corporate paper and other kinds of short-term debt and account for about 20 per cent of money market fund assets — rippled through financial markets. The disruption prompted the US central bank to step in to avoid the market turmoil morphing into a financial crisis.
Read more here.