Imposing a 3% capital buffer on money market funds (MMFs) could result in up to €250bn less lending to the European economy, an industry body has warned.
In an updated position paper addressing the European Commission’s proposed regulation of MMFs, the Institutional Money Market Funds Association (IMMFA) said that the plan to require MMFs to hold a 3% capital buffer would hamper the funds.
It said: “The current assets under management of constant net asset value (CNAV) MMFs are around €480bn. Applying the proposed 3% buffer would require a total of around €14bn of capital to be set aside. Of this, €4bn would be provided by non-bank sponsors, but the balance of €10bn would come from bank sponsors.”
It then pointed out that banks, too, are constrained by the amount of capital that they have available. “If they were obliged to allocate €10bn to provide buffers for MMFs, that amount would have to be withdrawn from the wider economy,” it noted.
“This effect would be amplified, as banks are geared typically between 20 to 25 times, resulting in a reduction of lending to the European economy of €200 to €250bn.”
IMMFA also argued that CNAV MMFs do not pose a greater degree of financial risk to the financial system than the variable net asset value (VNAV) MMFs favoured by regulators.
It commented: “The introduction of capital buffers would lead to the conversion of any CNAV MMFs to VNAV. However, this conversion will not prevent client redemptions in times of market stress, therefore, systemic risk will not have been reduced. The presumption that VNAV investors would be more content to take losses than CNAV investors is completely implausible, and there is no evidence to support it.”
Commenting on the report, Susan Hindle Barone, secretary general of IMMFA, said: “We are keen to work with regulators to ensure that we address the real issues at the heart of the MMF debate. The key to reliable, robust funds lies in liquidity and transparency.
Liquidity fees and redemption gates are the most direct and effective measures to dampen volatility in stressed market conditions.”
Sally Percy is editor of The Treasurer