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A Consequence of Money Fund Regulations Poses Systemic Risk, Report Says

A report by a Federal Reserve Bank of Boston markets specialist explores the impact of money market fund regulations on the money fund sector and related systemic risk. According to the report, in the nine months leading to the October 2016 implementation of money fund regulation, assets in prime funds declined by over $1 trillion, while assets in government funds increased by a similar amount. The reallocation of assets led to increased demand for debt issued by the U.S. government and government-sponsored enterprises. The Federal Home Loan Bank System, a GSE, played a key role in meeting demand for U.S. government-related assets with increased issuance of short-term debt. The FHLBank System comprises 11 regional banks and over 7,000 members and was established to support mortgage lending by providing funding to its members, including large banks like JPMorgan Chase and Wells Fargo. The report noted that FHLBank members have grown increasingly reliant on short-term funding from government money market funds to finance their longer-term assets and that this funding model could be vulnerable to runs that could have negative systemic impact. “By borrowing from government money market funds on a significant scale and lending substantially to a handful of the largest banks, FHLBanks’ funding model may be vulnerable to a funding shock that could spill over into the broader financial system.” 

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