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Shadow Insurance? Money Market Fund Investors and Bank Sponsorship

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Abstract

We argue that bank holding companies (BHCs) extend shadow insurance to the prime institutional money market funds (PI-MMFs) they sponsor and that PI-MMFs price this shadow insurance by charging investors significantly higher expense ratios and paying lower net yields. We provide evidence that after September 2008, expense ratios at BHC-sponsored PI-MMFs increased more than at non-BHC-sponsored PI-MMFs. Despite higher expense ratios, BHC-sponsored PI-MMFs did not experience larger redemptions than non-BHC-sponsored PI-MMFs. In addition, we show that expenses ratios increased with BHCs’ financial strength and the likelihood of their support; however, this expense ratio differential disappeared after the 2016 MMF reform.

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  • Stefan Jacewitz & Haluk Unal & Chengjun Wu, 2021. "Shadow Insurance? Money Market Fund Investors and Bank Sponsorship," Research Working Paper RWP 21-07, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:93102
    DOI: 10.18651/RWP2021-07
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    1. Oefele, Nico & Baur, Dirk G. & Smales, Lee A., 2024. "Flight-to-quality—Money market mutual funds and stablecoins during the March 2023 banking crisis," Economics Letters, Elsevier, vol. 234(C).
    2. Stefan Jacewitz, 2023. "Rapid Declines in the Fed’s Overnight Reverse Repurchase (ON RRP) Facility May Start to Slow," Economic Bulletin, Federal Reserve Bank of Kansas City, pages 1-4, November.

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    More about this item

    Keywords

    Bank Holding Company; Financial Crisis; money market funds; Banks and banking; Bank Run;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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