Can Redemption Fees Prevent Runs on Funds?

Xuesong Huang () and Todd Keister

No 1160, Staff Reports from Federal Reserve Bank of New York

Abstract: We ask whether imposing fees on redeeming investors can prevent runs on money market mutual funds (MMFs) and related intermediation arrangements. We first show that imposing a fee only in extraordinary times often leaves the fund susceptible to a preemptive run where investors rush to redeem before the fee applies. We then show how a policy that imposes a fee when current redemption demand is above a threshold, even in normal times, can make the fund run proof. We characterize the best policy of this type, which is immune to a run of any size. We show that the reform adopted in the U.S. in 2023 leaves funds vulnerable to runs in some market conditions and imposes an inefficiently large fee in others.

Keywords: financial stability policy; preemptive runs; shadow banking (search for similar items in EconPapers)
JEL-codes: D82 G23 G28 (search for similar items in EconPapers)
Pages: 68
Date: 2025-08-01
New Economics Papers: this item is included in nep-mon
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DOI: 10.59576/sr.1160

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