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US dollar funding markets during the Covid-19 crisis - the money market fund turmoil

Author

Listed:
  • Egemen Eren
  • Andreas Schrimpf
  • Vladyslav Sushko

Abstract

Short-term dollar funding markets experienced severe dislocations in mid-March 2020, with funding diverted from unsecured funding markets as investors withdrew and switched to secured funding markets and government MMFs. Outflows from US prime MMFs led to a loss of funding for banks and a significant shortening of funding maturities; this precipitated spikes in indicators of bank funding costs, such as the LIBOR-OIS spread, despite banks not being at the epicentre of the liquidity squeeze. The turmoil highlights broader lessons for MMF regulation, the role of non-banks for monetary policy implementation, and the role of the central bank during stress.

Suggested Citation

  • Egemen Eren & Andreas Schrimpf & Vladyslav Sushko, 2020. "US dollar funding markets during the Covid-19 crisis - the money market fund turmoil," BIS Bulletins 14, Bank for International Settlements.
    • Handle: RePEc:bis:bisblt:14
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    References listed on IDEAS

    as
    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Iñaki Aldasoro & Ingo Fender & Bryan Hardy & Nikola Tarashev, 2020. "Effects of Covid-19 on the banking sector: the market's assessment," BIS Bulletins 12, Bank for International Settlements.
    3. Egemen Eren & Andreas Schrimpf & Vladyslav Sushko, 2020. "US dollar funding markets during the Covid-19 crisis - the international dimension," BIS Bulletins 15, Bank for International Settlements.
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    Cited by:

    1. Cesa-Bianchi, Ambrogio & Eguren-Martin, Fernando, 2021. "Dash for dollars," Bank of England working papers 932, Bank of England.
    2. Fernando Avalos & Dora Xia, 2021. "Investor size, liquidity and prime money market fund stress," BIS Quarterly Review, Bank for International Settlements, March.
    3. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard Anna Maria, 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," Journal of Financial Stability, Elsevier, vol. 70(C).
    4. David Aikman & Daniel Beale & Adam Brinley-Codd & Anne-Caroline Hüser & Giovanni Covi & Caterina Lepore, 2023. "Macro-Prudential Stress Test Models: A Survey," IMF Working Papers 2023/173, International Monetary Fund.
    5. Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2023. "Stress relief? Funding structures and resilience to the covid shock," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 47-81.
    6. Ross Levine & Chen Lin & Mingzhu Tai & Wensi Xie, 2021. "How Did Depositors Respond to COVID-19? [A crisis of banks as liquidity providers]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5438-5473.
    7. Aldasoro, Iñaki & Ehlers, Torsten & Eren, Egemen, 2022. "Global banks, dollar funding, and regulation," Journal of International Economics, Elsevier, vol. 137(C).
    8. Egemen Eren & Andreas Schrimpf & Vladyslav Sushko, 2020. "US dollar funding markets during the Covid-19 crisis - the international dimension," BIS Bulletins 15, Bank for International Settlements.
    9. Maurizio Trapanese, 2021. "The economics of non-bank financial intermediation: why do we need to fill the regulation gap?," Questioni di Economia e Finanza (Occasional Papers) 625, Bank of Italy, Economic Research and International Relations Area.
    10. Jean Barthélémy & Paul Gardin & Benoit Nguyen, 2023. "Stablecoins and the Financing of the Real Economy," Working papers 908, Banque de France.
    11. Voellmy, Lukas, 2021. "Preventing runs with fees and gates," Journal of Banking & Finance, Elsevier, vol. 125(C).
    12. Inaki Aldasoro & Wenqian Huang & Esti Kemp, 2020. "Cross-border links between banks and non-bank financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
    13. Ivan, Miruna-Daniela & Banti, Chiara & Kellard, Neil, 2022. "Prime money market funds regulation, global liquidity, and the crude oil market," Journal of International Money and Finance, Elsevier, vol. 127(C).
    14. Gökçer Özgür, 2021. "Shadow banking and financial intermediation," Metroeconomica, Wiley Blackwell, vol. 72(4), pages 731-757, November.
    15. John Caramichael & Gordon Y. Liao, 2022. "Stablecoins: Growth Potential and Impact on Banking," International Finance Discussion Papers 1334, Board of Governors of the Federal Reserve System (U.S.).
    16. O'Donnell, Niall & Shannon, Darren & Sheehan, Barry, 2023. "A vaccine for volatility? An empirical analysis of global stock markets and the impact of the COVID-19 vaccine," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    17. Enrique Esteban García-Escudero & Elisa J. Sánchez Pérez, 2020. "Central bank currency swap lines," Occasional Papers 2025, Banco de España.
    18. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard, 2021. "How does the repo market behave under stress? Evidence from the Covid-19 crisis," Bank of England working papers 910, Bank of England, revised 18 Jun 2021.
    19. Indriawan, Ivan & Jiao, Feng & Tse, Yiuman, 2022. "Price discovery between forward-looking SOFR and LIBOR," Finance Research Letters, Elsevier, vol. 47(PB).

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