Economists from the Federal Reserve Bank of New York continue their jihad against money market funds with "The Fragility of an MMF-Intermediated Financial System." They write, "Since the financial crisis of 2007-09 -- and, in particular, the run on prime money market funds (MMFs) in September 2008 -- policymakers have been concerned that the funds' fragility may render banks themselves more susceptible to risk. For instance, in a recent article and speech arguing in favor of MMF reform, New York Fed President Bill Dudley stated that MMF fragility may contribute to financial market systemic risk. The idea that the susceptibility of MMFs to runs may make the financial system more unstable seems intuitive, but is it correct? In this post, we show that the idea isn't only intuitively appealing, it's also sound from an economic theory standpoint: MMF fragility is indeed a concern for the stability of the banking system and a contributing factor to financial market systemic risk.... Traditionally, banks have financed their investments in loans and long-term securities by collecting demand deposits from both households and corporations. In recent decades, however, U.S. banks have also increasingly relied on funding from other financial intermediaries, such as MMFs. As we discuss in an earlier post, MMFs collect money from large institutional and retail investors in order to provide short-term funding to the financial sector and to banks in particular. In the United States, they're a significant player in the short-term funding market. The funds managed approximately $2.5 trillion in assets at the end of 2012. As the table below shows, MMFs held 43 percent of financial commercial paper, 29 percent of certificates of deposit, and 33 percent of repo agreements."
