S&P Recognizes Implicit MMF Guarantees When Assessing Banks

I hadn’t been aware of this when I wrote my opinion piece A Collateral Proposal

The Federal Reserve discloses a “memo to file” on a meeting June 8, 2004, with S&P about Basel II:

Standard & Poor’s proprietary capital model is the primary driver for assessing capital, but regulatory capital is also taken into consideration. Standard & Poor’s already incorporates an operational risk capital charge into its capital assessment of trust and custody banks by deducting a certain basis point amount from capital for the amount of assets under custody (AUC) and assets under management (AUM).

With regard to assets under management, Standard & Poor’s methodology requires banks to hold more capital for money market funds than for equities and fixed income pooled funds, as it is the investor who takes the market risk for the latter two asset classes. The bank, on the other hand, provides an implicit guarantee with money market funds. This is because a bank will step in and support its sponsored money market funds if they are in danger of “breaking the buck”.

Assiduous readers will remember that the proposal to incorporate the implicit credit guarantee banks give to their branded Money Market Funds has been supported in principal by Ian de Verteuil of BMO-CM – although his proposal differs somewhat in specifics.

Leave a Reply

You must be logged in to post a comment.