Did Public Debt Assets Improve the Resilience of Money Market Funds during the COVID-19 Crisis?

Peter Dunne and Raffaele Giuliana
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Raffaele Giuliana: Central Bank of Ireland

No 5/FS/22, Financial Stability Notes from Central Bank of Ireland

Abstract: This paper aims to inform the debate about the reform of MMF regulation, which is currently a central theme for several prominent policy institutions. Some types of MMFs experienced challenging outflows in March 2020. This, and evidence suggesting that flows are linked with proximity to liquidity thresholds, has led to a reassessment of the adequacy of the post-GFC regulatory architecture. A suggested alternative to mandating the use of ever more complex liquidity management tools, is to require funds to hold assets that remain liquid and valuable during a crisis. Using supervisory data on Irish-domiciled non-public debt MMFs (i.e., LVNAVs and VNAVs), we provide robust graphical and econometric evidence indicating that MMFs voluntarily holding more Public-Debt Assets (PDAs) than required by MMF regulations, experienced lower outflows during the COVID-19 crisis. There is also evidence of resilience effects associated with having deposit buffers above requirements.

Date: 2022-06
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