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Marco Cipriani - One of the best experts on this subject based on the ideXlab platform.
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The Money Market Fund Liquidity Facility
2020Co-Authors: Marco Cipriani, Gabriele La Spada, Reed Orchinik, Aaron PlessetAbstract:Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) Money Market Funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into government MMFs, which have historically been seen by investors as a safe haven in times of crisis. In this post, we describe a liquidity facility established by the Federal Reserve in response to these outflows.
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Investors’ Appetite for Money-Like Assets: The MMF Industry after the 2014 Regulatory Reform
Journal of Financial Economics, 2020Co-Authors: Marco Cipriani, Gabriele La SpadaAbstract:This paper uses a quasi-natural experiment to estimate the premium for Money-likeness. The 2014 SEC reform of the Money Market Fund (MMF) industry reduced the Money-likeness of prime MMFs by increasing their information sensitivity, while leaving government MMFs unaffected. Investors fled from prime to government MMFs, with total outflows exceeding 1 trillion dollars. Using a difference-in-differences design, we estimate the premium for Money-likeness to be between 20 and 30 basis points. These premiums are not due to changes in investors' risk tolerance or Funds' risk taking. Our results support recent developments in monetary theory identifying information insensitivity as a key feature of Money.
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The Transmission of Monetary Policy and the Sophistication of Money Market Fund Investors
2019Co-Authors: Marco Cipriani, Jeff Gortmaker, Gabriele La SpadaAbstract:In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal Funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed Funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by Money Market Funds (MMFs) to their investors and show that the impact varies depending on investors? sophistication.
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The Premium for Money-Like Assets
2018Co-Authors: Marco Cipriani, Gabriele La SpadaAbstract:Several academic papers have documented investors? willingness to pay a premium to hold Money-like assets and focused on its implications for financial stability. In a New York Fed staff report, we estimate such premium using a quasi-natural experiment, the recent reform of the Money Market Fund (MMF) industry by the Securities and Exchange Commission (SEC).
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Investors’ Appetite for Money-Like Assets: The Money Market Fund Industry after the 2014 Regulatory Reform
Staff Reports, 2017Co-Authors: Marco Cipriani, Gabriele La SpadaAbstract:This paper uses a quasi-natural experiment to estimate the premium investors are willing to pay to hold Money-like assets. The 2014 SEC reform of the Money Market Fund (MMF) industry reduced the Money-likeness only of prime MMFs, by increasing the information sensitivity of their shares, and left government MMFs unaffected. As a result, investors fled from prime to government MMFs, with total outflows exceeding $1 trillion. By comparing investors? response to the regulatory change with past episodes of industry dislocation (for example, the 2008 MMF run), we highlight the difference between a desire to preserve Money-likeness and a simple flight to safety. Using a difference-in-differences design that exploits the differential treatment of prime and government MMFs, as well as institutional and retail share classes, we estimate the premium for Money-likeness to be 20 basis points for retail investors and 28 basis points for institutional ones (who have been more affected by the regulation). Using family specialization as an instrument for Fund yields, we are able to identify the elasticity of substitution between prime and government institutional MMF shares: the regulation caused the elasticity to decrease from 0.50 to 0.11.
Gabriele La Spada - One of the best experts on this subject based on the ideXlab platform.
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The Money Market Fund Liquidity Facility
2020Co-Authors: Marco Cipriani, Gabriele La Spada, Reed Orchinik, Aaron PlessetAbstract:Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) Money Market Funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into government MMFs, which have historically been seen by investors as a safe haven in times of crisis. In this post, we describe a liquidity facility established by the Federal Reserve in response to these outflows.
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Investors’ Appetite for Money-Like Assets: The MMF Industry after the 2014 Regulatory Reform
Journal of Financial Economics, 2020Co-Authors: Marco Cipriani, Gabriele La SpadaAbstract:This paper uses a quasi-natural experiment to estimate the premium for Money-likeness. The 2014 SEC reform of the Money Market Fund (MMF) industry reduced the Money-likeness of prime MMFs by increasing their information sensitivity, while leaving government MMFs unaffected. Investors fled from prime to government MMFs, with total outflows exceeding 1 trillion dollars. Using a difference-in-differences design, we estimate the premium for Money-likeness to be between 20 and 30 basis points. These premiums are not due to changes in investors' risk tolerance or Funds' risk taking. Our results support recent developments in monetary theory identifying information insensitivity as a key feature of Money.
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The Transmission of Monetary Policy and the Sophistication of Money Market Fund Investors
2019Co-Authors: Marco Cipriani, Jeff Gortmaker, Gabriele La SpadaAbstract:In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal Funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed Funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by Money Market Funds (MMFs) to their investors and show that the impact varies depending on investors? sophistication.
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The Premium for Money-Like Assets
2018Co-Authors: Marco Cipriani, Gabriele La SpadaAbstract:Several academic papers have documented investors? willingness to pay a premium to hold Money-like assets and focused on its implications for financial stability. In a New York Fed staff report, we estimate such premium using a quasi-natural experiment, the recent reform of the Money Market Fund (MMF) industry by the Securities and Exchange Commission (SEC).
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Investors’ Appetite for Money-Like Assets: The Money Market Fund Industry after the 2014 Regulatory Reform
Staff Reports, 2017Co-Authors: Marco Cipriani, Gabriele La SpadaAbstract:This paper uses a quasi-natural experiment to estimate the premium investors are willing to pay to hold Money-like assets. The 2014 SEC reform of the Money Market Fund (MMF) industry reduced the Money-likeness only of prime MMFs, by increasing the information sensitivity of their shares, and left government MMFs unaffected. As a result, investors fled from prime to government MMFs, with total outflows exceeding $1 trillion. By comparing investors? response to the regulatory change with past episodes of industry dislocation (for example, the 2008 MMF run), we highlight the difference between a desire to preserve Money-likeness and a simple flight to safety. Using a difference-in-differences design that exploits the differential treatment of prime and government MMFs, as well as institutional and retail share classes, we estimate the premium for Money-likeness to be 20 basis points for retail investors and 28 basis points for institutional ones (who have been more affected by the regulation). Using family specialization as an instrument for Fund yields, we are able to identify the elasticity of substitution between prime and government institutional MMF shares: the regulation caused the elasticity to decrease from 0.50 to 0.11.
Natalia T. Tamirisa - One of the best experts on this subject based on the ideXlab platform.
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Monetary policy and balance sheets
Journal of Policy Modeling, 2017Co-Authors: Deniz Igan, Alain Kabundi, Francisco Nadal De Simone, Natalia T. TamirisaAbstract:This paper examines the transmission of monetary policy shocks through private sector balance sheets in the United States over the past three decades. Using a Factor-Augmented Vector Autoregression (FAVAR) model on an expanded dataset, including sectoral balance sheet variables, we show that the balance sheets of various economic agents act as important links in the monetary policy transmission mechanism and affect the impulse response of inflation, output, and unemployment. Balance sheets of financial intermediaries, such as commercial banks, asset-backed-security issuers and, to a lesser extent, security brokers and dealers, shrink in response to monetary tightening, while Money Market Fund assets grow. However, their economic significance in the run-up to the recent financial crisis was small. Furthermore, judging from the magnitude of the interest rate elasticity of house price changes, it seems that large increases in interest rates would have been needed to avert a rapid rise of house prices and an unsustainable increase in leverage. This suggests that financial stability concerns may require some role for other policies such as macroprudential policy.
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Monetary Policy and Balance Sheets
IMF Working Papers, 2013Co-Authors: Deniz Igan, Alain Kabundi, Francisco Nadal De Simone, Natalia T. TamirisaAbstract:This paper evaluates the strength of the balance sheet channel in the U.S. monetary policy transmission mechanism over the past three decades. Using a Factor-Augmented Vector Autoregression model on an expanded data set, including sectoral balance sheet variables, we show that the balance sheets of various economic agents act as important links in the monetary policy transmission mechanism. Balance sheets of financial intermediaries, such as commercial banks, asset-backed-security issuers and, to a lesser extent, security brokers and dealers, shrink in response to monetary tightening, while Money Market Fund assets grow. The balance sheet effects are comparable in magnitude to the traditional interest rate channel. However, their economic significance in the run-up to the recent financial crisis was small. Large increases in interest rates would have been needed to avert a rapid rise of house prices and an unsustainable expansion of mortgage credit, suggesting an important role for macroprudential policies.
Patrick E. Mccabe - One of the best experts on this subject based on the ideXlab platform.
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the minimum balance at risk a proposal to mitigate the systemic risks posed by Money Market Funds
Staff Reports, 2013Co-Authors: Patrick E. Mccabe, Marco Cipriani, Michael Holscher, Antoine MartinAbstract:This paper introduces a proposal for Money Market Fund (MMF) reform that could mitigate systemic risks arising from these Funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed Funds. Our proposal would require that a small fraction of each MMF investor's recent balances, called the "minimum balance at risk" (MBR), be demarcated to absorb losses if the Fund is liquidated. Most regular transactions in the Fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions would subordinate a portion of an investor's MBR, creating a disincentive to redeem if the Fund is likely to have losses. In normal times, when the risk of MMF losses is remote, subordination would have little effect on incentives. We use empirical evidence, including new data on MMF losses from the U.S. Treasury and the Securities and Exchange Commission, to calibrate an MBR rule that would reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises.
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Twenty-Eight Money Market Funds That Could Have Broken the Buck: New Data on Losses during the 2008 Crisis
2013Co-Authors: Marco Cipriani, Michael Holscher, Antoine Martin, Patrick E. MccabeAbstract:During the financial crisis in 2008, just one Money Market Fund (MMF) ?broke the buck??that is, its share price dropped below one dollar. The Reserve Primary Fund announced on September 16 that the value of its shares had dropped to 97 cents. As we discussed in a previous post, Reserve?s announcement helped spark a widespread, damaging run on MMFs that slowed only when the federal government intervened three days later to backstop the Funds.
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Money Market Funds and Systemic Risk
2012Co-Authors: Marco Cipriani, Michael Holscher, Antoine Martin, Patrick E. MccabeAbstract:On September 16, 2008, Reserve Primary Fund, a Money Market Fund (MMF) with $65 billion in assets under management, announced that losses in its portfolio had caused the value of shares in the Fund to drop from $1.00 to $0.97. The news that an MMF had ?broken the buck? spread panic quickly to other MMFs. In the two days following Reserve?s announcement, investors withdrew approximately $200 billion (10 percent of assets) from so-called ?prime? MMFs, which, like Reserve, mainly invest in privately issued short-term securities. The massive redemptions and resulting strains on MMFs contributed to a freezing of the Markets that provide short-term credit to businesses and financial institutions and a sudden spike in short-term interest rates. Responding to these severe disruptions, the Treasury Department intervened on September 19 with a government guarantee of the value of MMF shares, and the Federal Reserve announced on the same day a facility designed to provide liquidity to MMFs. These unprecedented actions stopped the run on MMFs (for more analysis of the run in 2008, see McCabe, 2010). In this post, we discuss why MMFs are a source of financial fragility and the need for reforms to mitigate the risks they pose to the financial system and the economy.
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The Cross Section of Money Market Fund Risks and Financial Crises
SSRN Electronic Journal, 2010Co-Authors: Patrick E. MccabeAbstract:This paper examines the relationship between Money Market Fund (MMF) risks and outcomes during crises, with a focus on the ABCP crisis in 2007 and the run on Money Funds in 2008. I analyze three broad types of MMF risks: portfolio risks arising from a Fund's assets, investor risk reflecting the likelihood that a Fund's shareholders will redeem shares disruptively, and sponsor risk due to uncertainty about MMF sponsors' support for distressed Funds. I find that during the run on MMFs in September and October 2008, outflows were larger for MMFs that had previously exhibited greater degrees of all three types of risk. In contrast, as the asset-backed commercial paper (ABCP) crisis unfolded in 2007, many MMFs suffered capital losses, but investor flows were relatively unresponsive to risks, probably because investors correctly believed that sponsors would absorb the losses. However, the consequences of MMF risks were quite costly for some sponsors: Using a unique data set of sponsor interventions, I show that sponsor financial support was more likely for MMFs that previously earned higher gross yields (a measure of portfolio risk) and Funds with bank-affiliated sponsors. Funds' gross yields and bank affiliation (but not Funds' ratings) also would have helped forecast holdings of distressed ABCP. This paper provides some useful lessons for investors and policymakers. The significance of MMF risks in predicting poor outcomes in past crises highlights the importance of monitoring such risks, and I offer some useful proxies for doing so. The paper also argues for greater attention to the systemic risks posed by the industry's reliance on discretionary sponsor support.
Melanie L. Fein - One of the best experts on this subject based on the ideXlab platform.
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The Financial Stability Oversight Council's Proposals for Money Market Fund Reform
SSRN Electronic Journal, 2013Co-Authors: Melanie L. FeinAbstract:This paper examines the Financial Stability Oversight Council's proposals for Money Market Fund reform. It finds the proposals flawed by the lack of empirical support for the underlying premise that MMFs are susceptible to runs such that drastic changes are needed in their structure. Similarly, it finds empirical support lacking for the Council’s proposed determination that MMFs spread systemic risk. The paper shows that “systemic risk” and “financial stability” are developing concepts not completely understood by either regulators or academic economists. It suggests that regulators should wait for the results of ongoing research before proceeding with MMF changes in the name of “systemic risk” when such changes could harm investors, damage the short-term credit Markets, and have other unintended consequences for financial stability. Also, this paper argues that the Council cannot meaningfully consider the role of MMFs in the financial system until the role of banking organizations is clarified through reforms that remain as yet unimplemented.
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The SEC's Money Market Fund Proposal: An Inappropriate Use of the Investment Company Act to Address a Bank Regulatory Problem
SSRN Electronic Journal, 2013Co-Authors: Melanie L. FeinAbstract:This paper analyzes the Securities and Exchange Commission's June 2013 proposal relating to Money Market Funds. It argues that the proposal seeks to address a problem originating in the banking industry, not the MMF industry, and whose solution lies in banking regulation, not MMF regulation.
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The Shadow Banking Charade
SSRN Electronic Journal, 2013Co-Authors: Melanie L. FeinAbstract:Shadow banking emerged in the regulated banking system in the 1980s and 1990s when the traditional banking model became outmoded. Banking regulators encouraged shadow banking as the only way to preserve banks as viable entities in the financial system. They did not call it “shadow banking,” but rather treated it as part of the business of banking and extolled its benefits. Not until the financial crisis occurred did regulators begin the illusion of shadow banking as something sinister outside the regulated banking system. In adopting the shadow banking mythology, banking regulators deceived themselves as to the true nature of the forces that destabilized the financial system and misinformed policymakers in Congress. Now, having gained new powers to rid “systemic risk” anywhere in the financial system, they are seeking to uproot shadow banking competitors of banks that operate outside the regulated banking system. Chief among their targets is the Money Market Fund industry, notwithstanding that Money Market Funds are highly regulated and bear none of the key risk factors of shadow banks. This paper urges regulators to take a more introspective look at shadow banking as an invention of their own making within the regulated banking system and to avoid nullifying the positive aspects of shadow banking in their financial reform efforts.