BIS Annual Report Mentions MMFs
The Bank for International Settlements published its Annual Report yesterday, which contained a couple brief mentions of money market funds. In a section (on p.23) entitled, "Fault lines in market-based finance," they write, "In the early stages of the pandemic, in March 2020, the global financial system came under severe stress, especially in the non-bank financial intermediation (NBFI) sector. Several BIS research articles over the past year focused on NBFIs' interlinkages with the rest of the financial system and studied the impact on market functioning during the stress period. The market turmoil during the Covid-19 crisis in March 2020 highlighted structural vulnerabilities in non-bank financial intermediaries -- a sector which has gained significantly in importance since the Great Financial Crisis of 2007–09. A key focus of BIS research has been to understand how NBFI leverage in government bond markets and liquidity mismatches in money market funds (MMFs) and open-ended bond funds have played a role in the propagation of financial stress." The BIS brief explains, "Faced with substantial redemptions by investors, money market funds played an important role in the 'dash for cash' amid the deterioration in overall funding liquidity conditions. MMFs that cater to large investors in particular experienced substantial withdrawals during March 2020, in a manner that was largely unrelated to funds' liquidity conditions (see graph).... To respond to the redemption shock, MMF portfolio managers attempted to preserve their funds' liquidity conditions. In the case of open-ended bond funds, fund managers appeared to respond to the dash for cash by anticipating further sales, and ended up with larger cash balances at the end of March 2020 compared with the beginning of the month, in spite of the very substantial redemptions by investors. In this sense, asset sales were larger than might have been implied by investor redemptions, and were especially important in emerging market economy (EME) local currency bonds." The piece adds, "As in previous episodes (eg the Great Financial Crisis and European sovereign debt crisis), strains spilled over to offshore US dollar funding markets, affecting financing around the globe. These spillovers, which prompted a strong central bank response via swap lines, again highlighted the close interaction of funding and market liquidity and the importance of currency mismatches."
