Explaining the Life Cycle of Bank-Sponsored Money Market Funds: An Application of the Regulatory Dialectic

Stefan Jacewitz, Jonathan Pogach, Haluk Unal and Chengjun Wu
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Chengjun Wu: https://www.rhsmith.umd.edu/directory/chengjun-wu

No RWP 24-01, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: In this paper, we present empirical evidence of the regulatory dialectic in the prime institutional money market fund (PI-MMF) industry. The “regulatory dialectic”, developed by Kane (1977, 1981), describes how banks and regulators react to each other. For decades, a cap on commercial deposit interest rates fueled dramatic growth in bank-sponsored PI-MMFs as a form of shadow banking. During the growth period, banks with more commercial deposits were more likely to enter the PI-MMF industry in an effort to keep their commercial customers in affiliated subsidiaries. However, the 2008 crisis and subsequent regulatory changes halted the rapid growth of PI-MMFs. In the post-crisis regulatory regime, bank-sponsored funds were more likely to exit the industry than nonbank-sponsored funds. Simultaneously, the industry shifted from PI-MMFs to government institutional MMFs as substitute products. We conjecture that the collapse of the PI-MMF can lead further to the emergence of substitute products, such as stablecoins as part of the continuing dialectical process.

Keywords: bank; bank holding company; bank run; financial crisis; liquidity risk; money market funds; systemic financial risk; too big to fail (search for similar items in EconPapers)
JEL-codes: G2 G21 G23 G28 H12 H81 (search for similar items in EconPapers)
Pages: 41
Date: 2024-02-05
New Economics Papers: this item is included in nep-ban and nep-mon
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DOI: 10.18651/RWP2024-01

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