NEW YORK – Money market funds took unnecessary risks that resulted in their needing support, and while the SEC is working to secure money market funds, with proposed reform ideas expected in the coming months, “the status quo is not acceptable,” Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Wednesday.
“A number of money market funds took significant credit risk that ultimately led to them needing sponsor support in the period from 2007 to 2010,” Rosengren told the Federal Reserve Bank of Atlanta’s 2012 Financial Markets Conference, according to prepared text of his remarks released by the Fed. “Substantial government support was required after the Reserve Primary Fund experienced losses. Moreover, a significant number of money market funds continued to take substantial credit risk during the recent European financial problems. So, I must conclude that reforms enacted to date do not seem to sufficiently limit money market funds’ ability to assume excessive credit risks.”
“A money market fund with a fixed net asset value set by an intermediary with no capital that takes on credit risk will, eventually, result in the failure to meet obligations in the absence of outside support by either a sponsor or government. Funds need to be structured so that neither sponsor support nor government support is likely or necessary, even during times of stress.”
While the industry opposes measures that would reduce the “attractiveness of funds” despite strengthening the industry, “all in all I believe the risks to the stability of the financial system that underpins the economy are too great not to take the actions that will make the industry, and our financial system, more stable,” Rosengren said.
Some suggested fixes Rosengren made include “no longer transact at a fixed net asset value.” This would remind investors that the assets fluctuate and funds carry risk. But, the negatives are it changes funds “from a near-substitute for bank deposits into an asset with a fluctuating price,” making “funds less attractive as a transaction account for many investors – in part due to the taxable gains or losses.”
Another shortcoming is the change would “only partially prevents runs, because as soon as investors become concerned about credit losses, there is a strong incentive to get out of the fund early.”
Another suggested fix, Rosengren discussed, forcing funds to “hold capital, and to impose a cost on redemptions.”
