Working Paper: CEPR ID: DP13151
Authors: Ramin Baghai; Mariassunta Giannetti; Ivika Jager
Abstract: We exploit a change in regulation of money market funds to investigate how the structure of liabilities impacts financial intermediaries’ asset holdings. We show that following a change in regulation, which has made prime money market funds’ liabilities less money-like, safer funds exited the industry. The remaining funds have increased the riskiness of their portfolios, possibly in response to an increase in the sensitivity of flows to performance. As a result, issuers with lower risk of default have less access to funding from US money market funds. To the best of our knowledge, our paper provides the first evidence in support of theories highlighting that the characteristics of financial intermediaries’ assets and liabilities are jointly determined.
Keywords: moneyness; liquidity; money market funds; risk taking; fund exit; regulation
JEL Codes: G1; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory changes (G18) | Decrease in perceived moneylikeness of MMF liabilities (E49) |
| Regulatory changes (G18) | Exit of safer MMFs from the market (E44) |
| Exit of safer MMFs from the market (E44) | Increase in riskiness of remaining MMFs' portfolios (G19) |
| Regulatory changes (G18) | Increase in sensitivity of fund flows to performance (G41) |
| Increase in sensitivity of fund flows to performance (G41) | Increased riskiness of MMFs' portfolios (G19) |
| Regulatory changes (G18) | Shift in funding dynamics for issuers (G32) |
| Shift in funding dynamics for issuers (G32) | Lower default risk issuers less likely to obtain funding from US MMFs (G32) |
| Shift in funding dynamics for issuers (G32) | Higher risk issuers more likely to obtain funding from US MMFs (G32) |