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Paper Analyzing Systemic Risk of Money Market Funds

Melanie Fein, a former senior counsel to the Board of Governors of the Federal Reserve System, has written a paper analyzing the role of money market funds in creating systemic risk.  The paper concludes that money market funds pose no systemic risk to the financial stability of the United States and require no supervision by the Fed.  The author concludes that money market funds did not cause the financial crisis, are not subject to runs, and are not part of the "shadow banking system."  The author then notes that money market funds are subject to more stringent regulation than applies to banking organizations in several key areas, including having stronger governance.  The paper explains,

"MMFs are governed by boards of directors or trustees.  The Investment Company Act prohibits any MMF from having a board of directors or trustees more than 60 percent of whose members are 'interested persons' of the fund.  In practice, most large MMF complexes have boards that are 75 percent independent.  Unlike MMFs, banks and bank holding companies are not required to have independent boards of directors."

The paper also argues that money market funds have a record of safety far superior to that of banks, and that the Fed's proposals to subject money market funds to bank-like regulation would increase, not decrease, systemic risk.

The paper can be found here.