MONEY MARKET MUTUAL FUND REGULATION COULD DRY UP LIQUIDITY,
INDUSTRY GROUP CAUTIONS
Posted September 9, 2009
“Restoring bank liquidity is essential to increasing the availability of
credit, but some of these proposals would have the opposite effect,”
says Tom Deutsch, Deputy Executive Director, ASF. “Banks need both
capital and liquidity in order to lend. Restoring the flow of liquidity
from money market funds to banks and, therefore, to consumers and
corporations will bolster the liquidity and financial security needed
for economic recovery.”
Eliminating Tier II securities from eligible capital for money market
mutual funds could increase volatility and place additional pressure on
banks, according to the ASF, which recommends the SEC consider
increasing the 5 percent limit on these securities to avoid this
outcome. The ASF opposes the SEC proposal to eliminate the ability of
money market funds to invest in second-tier securities because it could
increase market volatility and place additional pressure on banks,
thereby increasing systemic risk.
Banks credit ratings are heavily concentrated within one notch of
potentially becoming ineligible for money market funds. If a bank’s
short-term rating is downgraded, access to the money market could be
eliminated, severely constraining liquidity. Increasing the 5 percent
limit on Tier II securities could reduce market volatility and maintain
banks’ access to liquidity and funding.
“Banks cannot be the sole source of funding for corporate and consumer credit,” says Deutsch. “They are limited by liquidity, regulation and capital constraints; but at the same time, they are being encouraged to increase lending to promote economic growth.”