The Truth About Money Funds

Abstract

Money market funds are highly liquid, short-term investment vehicles that perform vital functions in the nation’s financial markets and serve a variety of uses for investors. They afford investors access to high quality money market securities that otherwise would be unavailable to many investors. They are highly efficient and enhance the liquidity of the markets for U.S. government and agency securities, municipal bonds, commercial paper, and other money market instruments. Money funds are comprehensively regulated under the Investment Company Act of 1940. The Act restricts the composition of money fund portfolios, imposes disclosure and reporting requirements, and otherwise limits money fund operations and relationships with their investment advisers and other service providers. Money funds have none of the defining characteristics of banks, including the moral hazard and systemic risks posed by large banks. Money funds do not take deposits or make commercial loans. Nor do they leverage their assets in the way banks do or create off-balance sheet liabilities by securitizing their assets. They have operated successfully for decades without federal insurance or the need for central bank liquidity facilities. Money funds have provided critical liquidity to the financial system during the recent crisis and thereby helped to stabilize the financial markets and provide essential funding for economic activity. Any changes in the regulation of money funds to subject them to capital requirements or other inappropriate bank-like regulation would be detrimental to the role of money funds in the U.S. financial system.