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Bank of England governor Andrew Bailey has said that money market funds (MMFs) proved in the early stages of the pandemic that they were “not sufficiently resilient”. That is despite efforts to increase the stability of MMFs after their involvement in the demise of Lehman Brothers and the crash in 2008.
Speaking at the Isda AGM, Bailey said the pandemic shocked the market and led to a so-called “dash for cash” which threatened the stability of the global financial system. While central banks were able to intervene and prevent a full-blown financial crisis, it revealed the fragility of the financial system, particularly in MMFs.
“The dash for cash provided an unwelcome reminder that the post financial crisis did not finish the job and left a dangerous gap in our exposure to the risk of financial instability,” Bailey said.
As a result, Bailey said the Financial Stability Board (FSB) will now look to provide a “coherent package of reforms that address the current vulnerabilities in the money market fund sector”.
The reforms must move MMFs away from their current “muddy middle”, where it is unclear exactly how they should be used and what purpose they serve.
He proposed a combination of structural and usage reforms. First, that the asset holdings could be limited to reduce the risk of a run on MMFs. Second, that the liquidity mismatch could be removed by making funds non-daily dealing. And third to use a combination of these structures on MMFs to reduce risk to a “sufficiently low level”.
“Each of the three options I have just outlined may not be mutually exclusive. Properly differentiated, there may be a role for funds of each of these types, to suit the needs of the diverse set of existing MMF investors. We may end up with some MMFs becoming more cash-like and some less cash-like, but we need to avoid the muddy middle.”
“The FSB will shortly be consulting on what reforms would be most appropriate. The Bank of England remains very supportive of the work being taken forward by the FSB,” Bailey added.
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