The soft rib of the us financial system
The current U.S. financial system the most fragile link??? What??? The question was recently not many people are mentioned. After all, now it looks American banking quite well, at least the euro area than threatening bank is strong. In addition, is investigating the London interbank loan interest rates (Libor) scandal dominated the political debate and regulators main attention.
In the attention of the market for Libor scandal challenge, a brewing in fierce struggle is largely ignored. The fight involving the American financial system of a weak link-the size of the money market funds. Although the fight may not like Libor scandal that with gunpowder, but investors are still should pay close attention to, because of the financial world are likely to have a extensive and great impact.
The core of this struggle problem is, the size of $2.6 trillion of monetary market fund industry, can withstand the impact of “mass redemption”. In the 2008 years ago, few market observers put forward this problem, because at that time money market fund gives the impression of being “very inflexible”. It is no wonder that, according to the truth, money market funds can only the investment “security assets” (such as high credit rating bonds), the return on investment is also low. In addition, when it is widely believed that, money market funds will never “fell below $1” (that is, investors will never red).
But the 2008 financial crisis to break the idea that Lehman Brothers (Lehman Brothers) collapse, a money market fund really dipped below $1. This triggered a market panic. That’s why, although enjoy “stay if stagnant water” reputation, but money market funds have a Achilles heel: and bank account deposit is different, money market funds don’t have any deposit insurance for its to provide security, investors can redeem at any time. The fatal wound led to “cliff” problem, as the Federal Reserve Bank of New York (Federal Reserve Bank of New York) in a recent report * put it: if investors worry that a money market fund may fell below $1, they have a motive for the redemption as quickly as possible.
The good news is that 2008 years of monetary market fund initial encounter with the crisis, and not really the evolution of a destructive large-scale redemption. This is largely because the U.S. government intervention, for the system provides guarantee. Since then, the SEC (SEC) start introducing a few small scale reform, for example: compulsory requirement for the money market funds raise short-term liquid assets held the proportion, and further strengthening the information disclosure, in order to boost confidence.
But there is also a bad news-right now, the U.S. government has forbidden to money market funds provide more security. The SEC’s small reform does not help solve “cliff” risk: prompt investors in a crisis of large-scale redemption motivation still exists. Affected by this, money market fund managers became a group of bow-string. For example, last summer, they had a very against market stable way, heavy selling the eurozone assets. The beat and flee scene is very easy to appear again. For example, a U.S. government department recently conducted a secret study to evaluate the borrower defaults or the euro area some enterprise situation worsens may influence. The researchers found that, in both cases, too much money market fund will fell below $1. They think, this conclusion will create too much panic, therefore not suitable for public display.
Then existing solution? The SEC in their functions and powers are trying to promote within two big reform ideas. One is that the SEC hope money market funds can hold cash reserves, absorb losses, and allow fund net assets of floating. Secondly, the SEC hope money market funds can education investors, and should not be regarded as in money market fund investment bank account to save money. Federal reserve bank of New York, last week’s paper puts forward another idea: has the critical, answer money market fund investors with “fence” limit, that is, compulsory requirement for investors in the fund a small part in leaving money to absorb losses. This paper says, only 2% to 4% of the capital rules don’t allow redemptive, can prevent the large-scale redemption.
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