Money market mutual funds and financial stability

Money market mutual funds and financial stability

In the wake of Lehman Brothers’ failure in 2008, a money market mutual fund (MMMF) called the Reserve Primary Fund experienced substantial outflows, due to concerns about the fund’s credit exposure to Lehman. These events triggered large withdrawals from other MMMFs, resulting in Treasury and Federal Reserve programs to mitigate the outflows. Federal Reserve Bank of Cleveland economist Lakshmi Balasubramanyan looks at where MMMFs stand today, in terms of their riskiness and their ability to meet sudden liquidity requirements. She finds that the liquidity positions of prime funds have weakened somewhat since 2011 (when the data became available). While posing no immediate threat to financial stability, Balasubramanyan says regulators must keep an eye out for large fluctuations in MMMF’s holdings of liquid funds, which can pose a threat in the event of financial stress.

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Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.455.4479