The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets hitting a record for the sixth week in a row and the 11th week out of the past 13, breaking the $5.4 trillion barrier for the first time ever. Assets have risen by $600 billion, or 12.4%, over the past 14 weeks! ICI shows assets up by $685 billion, or 14.5%, year-to-date in 2023, with Institutional MMFs up $392 billion, or 12.8% and Retail MMFs up $293 billion, or 17.5%. Over the past 52 weeks, money fund assets have risen $894 billion, or 19.7%, with Retail MMFs rising by $550 billion (38.7%) and Inst MMFs rising by $344 billion (11.1%). (According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets hit a record $5.825 trillion on Wednesday, 5/31, after dipping around the Holiday weekend. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.)
The weekly release says, "Total money market fund assets increased by $31.74 billion to $5.42 trillion for the week ended Wednesday, May 31, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $29.59 billion and prime funds increased by $1.46 billion. Tax-exempt money market funds increased by $691 million." ICI's stats show Institutional MMFs jumping $19.8 billion and Retail MMFs rising $12.0 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.510 trillion (83.2% of all money funds), while Total Prime MMFs were $797.3 billion (14.7%). Tax Exempt MMFs totaled $112.4 billion (2.1%).
ICI explains, "Assets of retail money market funds increased by $11.97 billion to $1.97 trillion. Among retail funds, government money market fund assets increased by $8.09 billion to $1.33 trillion, prime money market fund assets increased by $3.25 billion to $540.20 billion, and tax-exempt fund assets increased by $628 million to $101.85 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 67.4% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $19.77 billion to $3.45 trillion. Among institutional funds, government money market fund assets increased by $21.50 billion to $3.18 trillion, prime money market fund assets decreased by $1.80 billion to $257.06 billion, and tax-exempt fund assets increased by $63 million to $10.52 billion." Institutional assets accounted for 63.6% of all MMF assets, with Government Institutional assets making up 92.2% of all Institutional MMF totals.
In other news, Federal Reserve Governor Philip Jefferson spoke yesterday on "Financial Stability and the U.S. Economy." He comments, "The Federal Reserve monitors and assesses potential vulnerabilities that may develop because of interactions among key participants. We do that by focusing on the safety and soundness of individual supervised institutions and by looking across the entire financial and nonfinancial system for potential risks and vulnerabilities. These risks and vulnerabilities can include elevated valuation pressures, excessive borrowing by households and businesses, excessive leverage in the financial system, and elevated funding risks. In other words, at the Federal Reserve, we use both microprudential and macroprudential approaches to monitor the health of financial institutions and the financial sector."
Jefferson says, "The recent banking stress events remind us that risks and vulnerabilities in financial markets are continuously changing. That is why the staff at the Federal Reserve is constantly monitoring domestic and foreign financial markets and institutions, as well as the financial condition of households and businesses, with the goal of identifying current and future vulnerabilities. Such forward-looking financial stability monitoring helps inform policymakers about ongoing vulnerabilities in the financial system that may amplify a range of potential adverse events or shocks."
He continues, "U.S. financial markets and institutions remain resilient even though financial stability risks and vulnerabilities in the U.S. financial system have increased since the recent stress events. Conditions in the banking sector have stabilized thanks, in part, to decisive emergency actions taken in March by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury. The Federal Reserve, using existing regulatory and supervisory tools, is working to ensure that banks improve and update their liquidity, commercial real estate, and interest rate risk-management practices."
The Fed Governor tells us, "Short-term interest rates are 5 percentage points higher than they were a little over a year ago. History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates.... [H]igher interest rates and lower earnings could test the ability of businesses to service debt. In addition, and perhaps more in focus given the recent events affecting certain areas of the banking sector, higher interest rates could further exacerbate stress at banking organizations, especially those that are highly exposed to longer-duration assets and have a relatively high ratio of uninsured deposits to total deposits."
He states, "As we have seen in the past couple of months, the failure of a large banking organization, even if not deemed individually systemically important under our regulations, can cause markets to reassess the condition of other firms with roughly similar size and risk profiles, and the resulting spillovers can generate significant negative consequences for the broader economy. As I mentioned earlier, conditions in the banking sector have stabilized. Moreover, broader U.S. financial markets and the overwhelming majority of financial institutions have been resilient to the recent stress events."
Jefferson also comments, "The resilience of the financial system to current salient risks can be appreciated by contrasting it to the 2008 Global Financial Crisis. Leading up to the Global Financial Crisis, housing markets were substantially overvalued, mortgage underwriting standards were weak, and home mortgages were at substantial risk of falling underwater if house prices fell. Yet banks had limited loss-absorbing capacity and were heavily reliant on wholesale short-term funding, and interconnections across the financial system were opaque. When housing markets weakened, opacity contributed to investors' fears, short-term funding pulled away, and excessive leverage led to fire sales as financial institutions experienced losses and major firms failed or were rescued by the government. The economy experienced a deep recession, and unemployment ultimately reached 10 percent."
He adds, "The current resilience of the financial sector points to substantially more limited spillovers from recent events. The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank showed excessive reliance at those institutions on uninsured deposits and excessive exposure to interest rate risk. Even so, the overwhelming majority of banks have strong balance sheets with limited leverage, high levels of loss-absorbing capacity, and healthy liquidity. Moreover, household and business balance sheets are generally strong, and the credit quality of loans is generally much better than on the eve of the Global Financial Crisis. Leverage across key parts of the financial sector, including especially the largest banks and broker-dealers, is much lower than in the mid-2000s."
Finally, Ferguson says, "Even so, we remain vigilant to the potential for vulnerabilities to emerge. Three areas of potential concern have been the focus of our supervisory and regulatory work. First, recent stresses highlighted the importance of effective liquidity and interest rate risk management, including both reliance on uninsured deposits and exposure to duration risk in asset holdings. While the resilience of the financial sector will limit the spillovers from recent events, I expect those strains to lead to a further tightening in credit supply from banks that will weigh on economic activity. Second, it is also important to assess how changes in the financial sector, including expanded use of online banking and shifts in behavior that may be driven by access to social media, may alter the potential speed of deposit flows."
