Jim Hamilton of Jim Hamilton’s World of Securities Regulation has posted a piece on regulatory initiatives that are at the discussion stage: Former Fed Chief Volcker Unveils Plan for Reforming Financial Regulation:
Former Federal Reserve Board head Paul Volcker has unveiled a plan for the reform of the regulation of the financial markets that envisions a macro prudential regulator and more robust regulation of credit rating agencies.
…
In addition, money market mutual funds wishing to continue to offer bank-like services, such as transaction account services, withdrawals on demand at par, and assurances of maintaining a stable net asset value (NAV) at par should be required to reorganize as special-purpose banks, with appropriate prudential regulation, government insurance, and access to central bank lender-of-last-resort facilities.Those institutions remaining as money market mutual funds should only offer a conservative investment option with modest upside potential at relatively low risk. The vehicles should be clearly differentiated from federally insured instruments offered by banks, such as money market deposit funds, with no explicit or implicit assurances to investors that funds can be withdrawn on demand at a stable NAV. Money market mutual funds should not be permitted to use amortized cost pricing, with the implication that they carry a fluctuating NAV rather than one that is pegged at US$1.00 per share.
I am unable to find primary sources for this assertion, but I’ll keep trying!
This would be a good move, given the effects of the Lehman bankruptcy:
It was the $785 million of losses on Lehman’s securities that pushed the value of the assets of a major money market firm below their $1 per share paid value, described as “breaking the buck.” This caused $400 billion to be taken out of money market funds in a matter of days, while the rest of the funds were frozen in anticipation of further withdrawals. Banks were relying heavily on these funds for their commercial paper and the result was a spiral of illiquidity.
Assiduous Readers will recall my Collateral Proposal of last year:
In practice, banks guarantee the credit quality of the Money Market Funds they sponsor. This guarantee should be reflected when computing their capital ratios.
Update, 2009-1-21: The paper was Financial Reform: A Framework for Financial Stability [new link, updated 2009-6-22], as reported by the Washington Post. The precise wording of the recommendation is:
a. Money market mutual funds wishing to continue to offer bank-like services, such as transaction account services, withdrawals on demand at par, and assurances of maintaining a stable net asset value (NAV) at par should be required to reorganize as special-purpose banks, with appropriate prudential regulation and supervision, government insurance, and access to central bank lender-of-last-resort facilities.
b. Those institutions remaining as money market mutual funds should only offer a conservative investment option with modest upside potential at relatively low risk. The vehicles should be clearly differentiated from federally insured instruments offered by banks, such as money market deposit funds, with no explicit or implicit assurances to investors that funds can be withdrawn on demand at a stable NAV. Money market mutual funds should not be permitted to use amortized cost pricing, with the implication that they carry a fluctuating NAV rather than one that is pegged at US$1.00 per share.
[…] first place, it was not Fuld’s compensation that caused the credit freeze of 4Q08: it was the sudden withdrawal of $400-billion from money market funds that accomplished that little trick. No individual, no company and not even any industry is able – […]
[…] Volcker proposals for MMF reform have been reported on PrefBlog and are addressed in section 8 of the report. commentators suggest that this would reduce systemic […]
[…] mix too well with borrowers’ desire for long-term funding at short term rates (see Volcker to Regulate Money Market Funds as Banks? and The US Dollar Shortage & Policy […]