Do redemptions increase as money market funds approach regulatory liquidity thresholds?

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

No 2/RT/22, Research Technical Papers from Central Bank of Ireland

Abstract: Regulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress.

Keywords: Money market funds; Liquidity limits (search for similar items in EconPapers)
JEL-codes: F30 G01 G15 G18 G20 G23 G28 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

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