BIS国际清算银行-US-dollar-funding-markets-during-the-Covid-19-crisis---the-money-market-fund-turmoil_9页_740kb

BIS Bulletin Summary: US Dollar Funding Markets During the Covid-19 Crisis – The Money Market Fund Turmoil

Core Content

This BIS Bulletin discusses the severe disruptions in short-term US dollar funding markets during the early stages of the Covid-19 crisis, focusing on the turmoil in money market funds (MMFs) and its impact on bank funding costs and market liquidity.

Main Points

• Market Disruptions: The crisis caused significant dislocations in short-term US dollar funding markets, particularly in commercial paper (CP) and certificate of deposit (CD) segments.
• MMF Outflows: Prime MMFs experienced large-scale redemptions, with outflows reaching $200 billion by end-March 2020, the largest since the 2016 MMF reform.
• Funding Cost Spikes: The outflows from prime MMFs led to a sharp rise in funding costs for banks, as evidenced by the widening of the LIBOR-OIS spread, which reached levels second only to those seen during the Great Financial Crisis (GFC).
• Central Bank Response: The Federal Reserve intervened with the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF), which helped stabilize the markets and reduce the spread to below 50 bp by early May 2020.
• Shift to Secured Funding: Investors moved towards secured funding markets and government MMFs, leading to a significant drop in risk-free rates, with T-bill and repo rates falling below zero.
• Portfolio Adjustments: MMFs, especially prime funds, adjusted their portfolios by reducing longer-maturity assets and increasing holdings of shorter-term instruments like overnight T-bills and reverse repos.
• Dealers' Constraints: Dealers faced balance sheet limits and were unable to absorb the large amounts of illiquid assets, exacerbating market stress and liquidity issues.

Key Information

• MMF Reform: The 2016 reform introduced a floating NAV and redemption gates, but did not fully eliminate the risk of redemption shocks.
• Impact on Banks: The liquidity squeeze from MMFs had a significant effect on bank funding, even though banks were not the main source of distress.
• Role of Central Banks: The Federal Reserve's actions were crucial in restoring market functioning and providing liquidity to the system.
• Market Behavior: The "dash for cash" behavior of investors highlighted the importance of liquidity in times of crisis and the role of MMFs as key intermediaries.
• Interest Rate Benchmarks: Disruptions in unsecured funding markets affected interest rate benchmarks like LIBOR, which now rely more on CP and CD rates than interbank deposits.

Implications and Policy Considerations

• Regulatory Review: The episode underscores the need to review MMF regulation and assess the sector's resilience in the face of liquidity shocks.
• Non-Bank Role in Policy: The growing influence of non-bank financial investors in money markets raises questions about their role in central bank facilities and how they should be integrated into monetary policy implementation.
• Central Bank Balance Sheet: The central bank balance sheet acted as a critical buffer during the crisis, accommodating the demand for safety from non-bank investors.
• Systemic Importance: The crisis highlighted the systemic importance of central bank liabilities and the potential benefits and costs of broader access to them.

Conclusion

The turmoil in MMFs during the Covid-19 crisis had far-reaching effects on US dollar funding markets, leading to significant shifts in funding flows and liquidity conditions. The Federal Reserve's timely intervention helped to mitigate the impact, but the episode provided important lessons for regulatory frameworks, the role of non-bank investors, and the systemic importance of central bank liquidity provision.

References

• Aldasoro I, Fender I, Hardy B and N Tarashev (2020): "Effects of Covid-19 on the banking sector: the market's assessment"
• Bank of England (2020): Interim Financial Stability Report
• Eren, E, A Schrimpf and V Sushko (2020): "US dollar funding markets during the Covid-19 crisis – the international dimension"
• Huang W and E Takáts (2020): "The CCP-bank nexus in the time of Covid-19"
• Schrimpf A, H S Shin and V Sushko (2020): "Leverage and margin spirals in fixed income markets during the Covid-19 crisis"