Money Market Funds vulnerabilities and systemic liquidity crises

Michel Baes, Antoine Bouveret and Eric Schaanning

Journal of Banking & Finance, 2025, vol. 179, issue C

Abstract: Despite regulatory reforms, Money Market Funds (MMFs) experienced severe stress in March 2020, following large redemptions and dislocations in short-term markets. We provide a model showing the trade-offs between liquidity and capital preservation services offered by MMFs. We show that in a crisis, MMFs cannot provide liquidity and capital preservation to investors at the same time. As a result, investors have an incentive to run pre-emptively. We calibrate our model on data from USD MMFs and find that most funds would have been unable to meet redemptions above 30% mid-March 2020. Unless short-term funding markets are made resilient in times of stress, MMFs will face similar challenges during future liquidity crises.

Keywords: Money Market Funds; Regulation; Runs; Systemic risk (search for similar items in EconPapers)
JEL-codes: G01 G23 G28 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426625001505
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:179:y:2025:i:c:s0378426625001505

DOI: 10.1016/j.jbankfin.2025.107530

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().