In response to a question from Senator Charles Schumer (D-NY) at a Senate Banking Committee hearing yesterday, Fed Chairman Ben Bernanke endorsed the 3% holdback requirement on money market fund withdrawals under consideration by the SEC. Under this proposal, investors attempting to withdraw their entire money market fund investment would only receive 97% immediately-the remaining 3% would be held back for 30 days. In supporting such reform, Bernanke stated that he believes money market funds are still susceptible to runs and noted that under Dodd-Frank, tools used in 2008 to prevent runs are no longer available.
Bernanke generally supports an SEC proposal that would include several alternatives for reforming money market fund regulations. He stated that because the industry will likely categorically reject a proposal for floating the NAV, the capital buffer and holdback proposals must be considered. He acknowledged that money market funds are a useful source of short-term money for our economy. However, he noted that one could structure a financial system without them as Europe had done.
An archived webcast of the hearing is available here.