Money Market Funds, Systemic Risk, and the Dodd-Frank Act

Abstract

This paper explains why money market funds are not banks, bank-like or shadow banks. It summarizes the regulation of MMFs and explains how the Fed's proposals to change the structure of money market funds would increase, not decrease, systemic risk. The paper examines the language and legislative history of the Dodd-Frank Act and concludes that Congress did not intend to require changes in the regulation of money market funds. It examines the criteria for SIFI status under the Dodd-Frank Act and shows how each criterion relates to money market funds. It argues that the Dodd-Frank Act authorizes the Fed to impose only more prudential standards on SIFIs and that the Fed's proposed standards are less stringent than the standards applicable to money market funds under the Investment Company Act. The paper argues that the Dodd-Frank Act does not authorize the Fed to restructure money market funds or to apply inappropriate bank regulatory standards to them and concludes that the Fed instead should use its exemptive authority under the Dodd-Frank Act to adopt exemptive criteria for money market funds. This paper was presented at a symposium sponsored by the American Enterprise Institute entitled Do Money Market Funds Create Systemic Risk?