Do liquidity limits amplify money market fund redemptions during the COVID crisis?

Peter G. Dunne and Raffaele Giuliana

No 127, ESRB Working Paper Series from European Systemic Risk Board

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. JEL Classification: G01, G15, G23, G28, G18, G20, F30

Keywords: liquidity limits; money market funds (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2021127

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