The Bank of England has called for money market funds (MMFs) to increase their holdings of liquid assets in order to better cope with market volatility. The Financial Policy Committee (FPC) stated that the £250 billion sterling MMF sector, which is commonly used by companies for daily funding and short-term cash storage, needs to be more resilient in the face of shocks. The committee recommended that MMFs should hold “significantly” more liquid assets than currently required in order to reduce risks to financial stability.
According to the FPC, analysis suggests that assets maturing within 7 days or less should make up at least 50% to 60% of a fund’s total assets. Currently, the sector has levels of 45% to 55%. The need for increased resilience in MMFs arises from the fact that they are part of the non-bank sector, which has grown since the 2008 financial crisis and now represents about half of the world’s financial assets. This sector is more complex and opaque than traditional banking, making it challenging for regulators to identify risks and potential contagion.
During the COVID-19 pandemic, MMFs faced difficulties due to a “dash for cash” as many investors sought to withdraw their funds. Central banks had to inject liquidity into the markets to stabilize MMFs and other parts of the financial system. The Bank of England, along with global regulators such as the Financial Stability Board and the U.S. Securities and Exchange Commission, has growing concerns about the need to address the opacity and liquidity vulnerabilities in the non-bank sector.
As most sterling-denominated MMFs are listed in European Union (EU) centers like Luxembourg, the UK will need to cooperate with the EU in regulating these funds. The Bank of England has previously implemented stricter liquidity rules for liability-driven investment funds (LDIs), which are used by pension funds. The focus on enhancing risk assessment and considering additional resilience standards for non-banks, including investment funds, hedge funds, private equity, pension funds, and insurers, is part of the Bank’s efforts to address potential risks in the market-based finance sector.
The non-bank sector has historically resisted being treated like banks, with regulations such as capital buffers. Regulators are now primarily focusing on strengthening liquidity within this sector.
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