Barron's on FSB Report and MMFs
Barron's published, "Global Central Bankers Cite The Risks of Backstopping Money Market Funds," which discusses "the latest report from the Financial Stability Board ... currently run by Randal Quarles, the U.S. Federal Reserve Bank's vice chairman for supervision." They write, "[T]he world's central bankers would like to see the U.S. federal government more thoroughly consider the risks of regularly backstopping the $4 trillion money market fund industry. The report titled 'Holistic Review of the March Market Turmoil' seeks to explain the financial meltdown prompted by the coronavirus, and address the potential policy implications." (See our Nov. 18 News, "FSB Reviews March Market Turmoil, Targets Short-Term Funding Markets.") The piece explains, "This March, prime funds suffered some $125 billion in outflows, representing 11% of their assets and the FSB's concern is redemptions would have -- absent government assistance -- sparked the fund equivalent of a systemic destabilizing run on the bank. Thus, `what was really a private-sector fund-related problem became a systemic one the Fed and taxpayers in the public sector had to solve. In March, the Fed created the Money Market Mutual Fund Liquidity Facility (MMLF) to stabilize funds." Barron's tells us, "The continued existence of such publicly-financed facilities is a major concern of the FSB report.... Yet the report acknowledges that the existing security measures in money markets and other funds don't solve the underlying structural problems.... Ironically, regulators put some of those structures in place in response to the last money market liquidity crisis in 2008-09 -- a regulatory shift in 2016 allowing money funds to impose a 2% redemption fee if liquid assets fell below 30% of a fund's portfolio, and to gate redemptions for up to 10 days. Yet those structures seem to have made things worse.... Yet eliminating those structures will put us right back to the zero-safeguard system we had before. All of which suggests some form of government backstop for money market funds is probably here to stay. 'The [FSB's] comment about moral hazard is just a nod to the old world,' says Peter Crane, president of money fund tracker Crane Data. [The Fed and regulators] keep saying 'we shouldn't be doing this,' and then, 'We're gonna keep doing it, and we're gonna wade in four more feet and see what happens. It's past the point where government intervention isn't a viable option.'" They add, "Some money fund managers say pinning the liquidity crisis on money funds is unfair. 'The fact that policymakers had to rescue nearly every part of the financial sphere hasn't stopped many pundits from -- again -- making money funds the scapegoat,' says Deborah Cunningham [of] Federated Hermes.... 'It was the broader market, especially both commercial paper and CD primary- and secondary-market trading, that froze.' She argues that money funds during the liquidity crunch 'actually alleviated the pressure,' and that no funds imposed fees or gated redemptions.'" Finally, Barron's says, "Yet other managers have become concerned enough about fund liquidity to exit parts of the business. Fidelity, which manages over $860 billion in money funds, liquidated its institutional prime funds this August. 'Our view is that during periods of market stress, institutional prime funds will continue to be susceptible to large, sudden redemptions -- this is not a fund product design issue that can be remedied by requiring more liquidity or decoupling the potential for redemption gates and fees from funds' weekly liquidity levels,' explains Fidelity representative Adam Banker. 'Similarly, a permanent liquidity backstop provided by the Federal Reserve is not an appropriate response for money market funds or any other investment product where investors bear the risk of investment performance.' Crane doesn't see the revocation of gate fees or the 30% liquidity requirement being either probable or imminent. He points out that even after the severer 2008 crash, these were minor reforms which took years to pass. 'The last thing [regulators] want is the critique that they're loosening regulations to be levied at them,' he says. Moreover, the FSB has no jurisdiction over money funds. The Securities & Exchange Commission does.... Since Biden is from Pennsylvania, and depends on its political support, Crane sees no changes happening as powerhouse money fund managers such as Vanguard and Federated Hermes call Pennsylvania home: 'Pennsylvania's money fund country.'"
