Shadow banking and financial stability:European money market funds in the global financial crisis
Elias Bengtsson *
Sveriges Riksbank,Brunkebergstorg,10339Stockholm,Sweden
Keywords:
Money market funds
Financial stability
Shadow banking
Contagion
Global financial crisis a b s t r a c t
When the troubles in the subprime markets began surfacing 2007,developments unfolded rapidly in the European MMF industry.The industry suffered from ast price drops and investor redemptions.But the dif ficulties of the MMF industry also spread to the banking ctor and contribut
ed to general financial insta-
bility that prevailed in 2007–2009.In this article,we describe the
main events and developments of the European MMF industry
during the global financial crisis.Bad on the obrvations,we
analy the transmission channels through which financial insta-
fman
bility may spread from the MMF ctor to the wider financial
system.Insofar,our article contributes to the understanding of
how other financial intermediaries and shadow banking may affect
随机数字表financial stability.A number of policy conclusions on shadow
banking and financial stability are also provided.
Ó2012Elvier Ltd.All rights rerved.
Abbreviations:ABCP,Ast backed commercial paper;ABS,Ast backed curity;AMF,Autoritédes marchés financier;CD,Certi ficate of deposit;CESR,Committee of European curities regulators;CNAV,Constant net ast value;CP,Commercial paper;CSSF,Commission de surveillance du cteur financier;EBA,European banking authority;EFAMA,European fund and ast management association;EONIA,Euro overnight index average;ESMA,European curities and markets authority;ESRB,European systemic risk board;EURIBOR,Euro interbank offered rate;FRN,Floating rate notes;ICI,Investment company institute;IMMFA,Institutional money market funds association;MMF,Money market fund;NAV,Net ast value;UCITS,Undertakings for collective investment in transferable curities;VNAV,Variable net ast value.也门航空公司
*Tel.:þ4687870000;fax:þ468210531.
E-mail address:elias.bengtsson@riksbank.
.
Contents lists available at SciVer ScienceDirect
Journal of International Money
and Finance
journal homepage :www.
/locate/jimf
0261-5606/$–e front matter Ó2012Elvier Ltd.All rights rerved.
dx.doi/10.1016/j.jimon fin.2012.05.027rica
Journal of International Money and Finance 32(2013)579–594
1.Introduction
Money market funds (MMFs)have a long history of delivering cash management rvices with high levels of liquidity,stability in principal value and competitive market-bad yields.They have been thought of as immune to runs and an important contributor to financial stability.Had not the subprime crisis occurred,this would perhaps still have been the prevailing belief.But when the troubles in the subprime markets began surfacing in 2007,developments unfolded rapidly in the MMF industry.Both in Europe and in the US,the industry suffered from ast price drops and enormous investor redemptions.And the dif ficulties of the MMF industry spread to the banking ctor and contributed to the general financial instability that prevailed in 2007–2009.
Although by now it is well known that the shadow banking system played a contagious role in the global financial crisis (Pozsar et al.,2010;Tucker,2010),the absolute bulk of financial stability rearch has focud on the banking ctor.1Studies on the role of MMFs in the crisis are few and primarily focud on developments in the US MMF industry (Dwyer and Tkac,2009;McCabe,2009;Brunnermeier,2009;Baba et al.2009).In respon to the limits in the scope of academic rearch on financial instability and shadow banking,this article:
Describes main events and developments of the European MMF industry during the global financial crisis of 2007–2009;
Analys transmission channels through which financial instability may spread from the MMF ctor to the wider financial system;and
Draws some policy conclusions on shadow banking and financial stability.
The article strives to capture the main events and the most vital actions and respons of the MMF industry and other key actors involved.A caveat is nevertheless necessary –it is of cour impossible to provide a comprehensive account of all events.Not least becau actions taken in respon to financial instability often include elements that may have repercussions on corporate or political reputation,and therefore remain hidden from the public.
In the following ction,we provide some relevant background information on the regulation and structure of the European MMF industry.Thereafter,Sections 3and 4describe the events and devel-opment of the MMF industry during the financial crisis.The first focus on the troubles following disruptions in the markets of ast backed curities (ABSs)in 2007;the cond on the period that followed the collap of Lehman Brothers.Section 5concludes by analysing the role of MMFs in finan
cial stability and draws a number of lessons for policy.
2.European money market funds –background
MMFs began appearing in the US in the early 1970s,following regulatory limits to interest payable on bank deposits (Dwyer and Tkac,2009).It took about a decade before the first MMF was created in Europe,but the reasons were similar –limits to interests on deposit accounts induced French ast managers to offer funds that could offer similar returns and characteristics as bank deposits,but without any restrictions on the interest yielded (Le Coz,2009).2Over the years,European MMFs have grown into a EUR 1.3t industry dominated by France,Luxembourg and Ireland (e Fig.1).3
Up to recently,there has been no harmonization or regulation at the EU level on what constitutes a MMF (for recent developments,e Section 5).Typically,a MMF is t up as an Undertaking for日语翻译证书
1
The term shadow banking is commonly understood to encompass the range of non-bank institutions that to various extents provide liquidity rvices,maturity mismatch or leverage.It was coined by (McCulley,2007)who views the development of MMFs as the birth of the shadow banking system (McCulley,2010).
2Since 2004,such caps do no longer exist,but MMFs have still offered attractive yields in comparison to current accounting interest rates (Fitch Ratings,2008).
3It is noteworthy that many MMFs that are domiciled in Ireland and Luxembourg are managed ,UK and Germany (Bengtsson and Delbecque,2011).E.Bengtsson /Journal of International Money and Finance 32(2013)579–594
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Collective Investment in Transferable Securities (UCITS).4This makes MMFs subject to 1)the require-ments in UCITS legislation (Directive 85/611/EEC )and 2)any supplemental regulations impod in the fund ’s domicile.The latter has led to notable cross-European differences,even among the largest Euro-pean MMF domiciles.This means that,unlike in the US where all MMFs are valued according to constant net ast value (CNAV),both CNAV and variable net ast value (VNAV)MMFs are available in Europe.
For instance,Irish bad MMFs are similar to the US type.The absolute bulk of MMFs are triple-A rated CNAV MMFs that adhere to the rules of IMMFA (ICI,2009).5This means that,apart from following the UCITS Directive requirements,the MMFs must have mechanisms to manage excep-ti
competition是什么意思onal events to safeguard their CNAVs and the interest of their investors.This includes temporary suspension of redemptions (when the net ast value (NAV)cannot be calculated or there are liquidity shortages)or imposing redemption gates (e.g.,on redemptions greater than 10%).The payment of proceeds may also be delayed (ICI,2009).
In France,an ast manager needs the approval by the curities regulation –the Autoritédes marchés financier –to classify an investment fund as a MMF.Apart from the main categories –Fonds Monétaire Euro (Eurozone money market funds);or Fonds Monétaire àvocation internationale (Inter-national money market funds)–France is also characterid by a large enhanced MMF gment (Fitch Ratings,2008).Despite the relatively large differences in ast allocation across the fund types,all MMFs in France are variable net ast value (VNAV)funds.This is also the ca for German MMFs.But in Germany,the regulator has opted for the ECB ’s de finition on what constitutes a MMF.6German MMFs also differ from other European MMFs in that they are predominantly retail oriented (Le Coz,2009).
7
Fig.1.European MMFs by country of domicile.Source:EFAMA,IFIA in Fitch Ratings (2010).
4
UCITS are fund products offered in accordance with the UCITS Directives (Directive 85/611/EEC and later additions and amendments)thereby regulated in terms of supervision,ast allocation and paration of management and safekeeping of asts to ensure the highest level of investor protection.
5IMMFA –The Institutional Money Market Funds Association –is the trade association which reprents the European triple-A rated MMF industry.
6According to REGULATION (EC)No 2819/98OF THE EUROPEAN CENTRAL BANK of 1December 1998,MMFs are de fined as tho Collective Investment Undertakings (CIUs)of which the units are,in terms of liquidity,clo substitutes for deposits and which primarily invest in money market instruments and/or in other transferable debt instruments with a residual maturity up to and including one year,and/or in bank deposits,and/or which pursue a rate of return that approaches the interest rates of money market instruments.The criteria identifying MMFs may be derived from the public prospectus,fund rules,instruments of incorporation,established statutes or by-laws,subscription documents or investment contracts,marketing documents,or any other statement with similar effect,of the CIUs.
dictionary
7A large majority of investors in European MMFs are institutional investors (e.g.,90%in France)and most of the remainders are high net worth individuals (ICI,2009).E.Bengtsson /Journal of International Money and Finance 32(2013)579–594581
Re flecting the regulatory differences across Europe,restrictions on eligible asts vary signi ficantly.Typically,investments are restricted to short-term high quality papers.8Asts include short-term government bonds,certi ficates of deposit (CDs),time deposits and repurcha agreements.But MMFs are also –to various degrees –allowed to invest in uncured commercial papers (CPs)and floating rate notes (FRNs),meaning that risk can vary substantially between different funds.
Investment in the latter type of instruments are particularly common for so-called dynamic ,absolute performance ,absolute return or enhanced MMFs (from here on all the are referred to as enhanced MMFs ).The funds ek to bridge the gap between traditional MMFs and bond funds,by pursuing higher returns –for instance 30basis points above inter-bank borrowing rates –by taking on additional risk.This is achieved by investing in longer-dated and more volatile instruments such as short-term bonds,currencies and arbitrage on credit instruments (Standard and Poor ’s,2007).While some are conrvatively managed,others may include varying levels of exposure to collateralized debt obligations (CDOs)and commercial papers (CPs)offered out of structured investment vehicles (
such as ast backed commercial papers (ABCPs))(Fitch Ratings,2006).
MMFs ’allocation (both ordinary and enhanced MMFs)is attractive in that it offers investors competitive returns in comparison with ordinary bank accounts.It also offers diversi fication across curities and issuers.9The MMF ctor is an important funding source,through their investment in short-term papers,for the banking ctor in particular.Many European banks obtain a substantial proportion of their funding from MMFs (primarily from US and Europe)and rely on them for rolling over short-term debt.This is hardly surprising,given the rapid growth of MMF asts under management (AuM)in recent years:from nearly EUR 900bn by end 2004to above EUR 1300bn at the peak of end Q12009.But in the enhanced MMF gment,developments are even more dramatic –increasing from around EUR 42bn by end 2004to a peak in Q22007at EUR 137bn.From then on,as the subprime crisis began to unfold,AuM of enhanced MMFs fell rapidly (e Fig.2).But before the crisis hit,market participants,scholars,central bankers and other policymakers all recognized that MMFs contribute signi ficantly and positively to financial stability (Kohn,2008).
3.Literature review
The academic literature has largely reached similar conclusions.The fact that MMFs typically experie
nce signi ficant in flows in times of financial volatility and turmoil has been takes as evidence for MMFs having a stabilizing effect on the financial system.For instance,Gorton and Pennacchi (1993)found that investors do not run from MMF even as commercial paper defaults increa.Similarly,Miles (2001)and Pennacchi (2006)showed that MMFs attracted net in flows following liquidity shocks.Miles (2001)concluded that investors perceive MMFs safer than ordinary banks.
The abnce of investor runs on MMFs in times of financial instability has also been explained by their relatively high transparency in comparison with banks.The idea is that since investors can continuously monitor the value of their investments,they face no uncertainty about the value of the fund shares.This reduces the risk of a run on the MMF (Scott,1998).Another explanation is that since they know they would bear the costs of triggering a descending price spiral,MMF investors are more likely refrain from making additional investments rather than redeeming units of MMFs in times of trouble (Klapper et al.2004).
However,Lyon (1984)shows investors have incentives to run on a CNAV MMF if there is uncertain valuation (due to accounting,liquidity premium etc).Shleifer and Vishny (1997)extend this reasoning by noting that a run may also be induced in a context where the value of a fund ’s units fluctuate (suc
micheal learns to rockh as a VNAV or equity fund)if there is valuation uncertainty.
The evidential low probability of runs on MMFs has meant that rearchers have largely ignored the risk of a MMF run squeezing the liquidity of the overall banking system.But most academic rearch did not anticipate the MMFs ’gradual creep toward riskier asts (e next ction).Indeed,the MMFs
8
For instance,German MMFs can only invest in curities with a maximum maturity of one year (Jank and Wedow,2008).9Such diversi fication is particularly helpful for institutional investors,since they are typically not covered by deposit guarantee schemes. E.Bengtsson /Journal of International Money and Finance 32(2013)579–594
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bene fited for long from non-traditional investments (in for instance ABSs),who regular returns,low levels of risk migration and defaults frequencies strengthened their perceived stability.Also,the condary markets for the asts were very active and market liquidity satisfactory.As will be showed in the subquent ctions,this development corresponds cloly to a “Minsky-cycle ”with
lf-reinforcing dynamics (cf.Minsky,1992),as market actors gradually took on additional risk in benevolent times,but were drawn into a negative loss-sales spiral when conditions in financial markets deteriorated.
In the abnce of any negative experiences,academic theory has in esnce been blind towards how credit or liquidity risk could manifest itlf in MMFs,let alone spread to other parts of the financial system through various contagion channels.
But such phenomena became clear in the stresd condition of the 2007–2008crisis (Dwyer and Tkac,2009)study of US MMFs during the crisis suggests that a run would have occurred,had it not been averted by signi ficant policy respons.In what can be described as a “first mover advantage ”,investors who sold early faced the prospects of being repaid their full amount,draining the fund of liquidity and high quality asts while leaving troubled instruments to their fellow MMF investors (Brunnermeier,2009).In what McCabe (2009)labels investor risk ,early redeemers impod loss on other investors who fund units became backed by asts that had or were likely to suffer loss (rembling phenomena described by Edelen (1999)and Nanda et al.(2000)).Substantial redemptions by US fund investors also expod portfolio risks (McCabe,2009).The risks manifested financial intermediaries started precautionary hoarding of cash when concerned about th
eir future access to liquidity.As the intermediaries started of floading their longer-term and more risky asts,prices dropped causing further sales and additional price drops (Brunnermeier,2009;Baba et al.2009).Also,trouble in the US MMF ctor spilled over on the banking system,as banks granted liquidity support to their fund managers to protect their franchi value and mitigate reputational risk (Brunnermeier,2009)
The next ction demonstrates that many of the obrvations are also valid for the events that unfolded in the European MMF industry during the subprime –and subquently –global financial crisis.
4.European MMFs and the market for ABSs –summer 2007to summer 2008
4.1.Troubles emerge in subprime ABS market
Until summer of 2007,ABS instruments and financial intermediaries with exposures to ABSs did not experienced any major dif ficulties.The deterioration in the credit quality of ABS had been limited to collateralized debt obligations (CDOs)of ABSs.Very few ABS tranches had been downgraded,and
the Fig.2.Asts of European enhanced MMFs –developments end 2000–end 2009.Source:Lipper FMI.
E.Bengtsson /Journal of International Money and Finance 32(2013)579–594583
rating agencies had been silent on the increasing loss on the 2006vintages.But that all changed in July 2007,when the market for more nior tranches ABSs declined sharply (e Fig.3).The triggering event is not known,but it has been suggested that a conference call between market participants and mortgage analysts at Standard and Poor ’s was an important driver (Greenlaw et al.2008).In July the Markit ABX index for the first vintage of 2007fell by around 10%for AAA rated and 26%for BBB-.10
Simultaneously,all major rating agencies (S&P,Moody ’s,Fitch and Dominion)downgraded or initiated reviews on a number of distresd subprime transactions.Delinquencies,foreclosures and loss were signi ficantly wor than previously expected,thus lowering the asts ’collateral value.The value of curities downgraded or placed under review amounted to more than $138bn (Kragenbring,2007).Credit market shuddered and put considerable upward pressure on money market spreads (e Fig.4below).
拍马屁英文
Although most European MMFs had no exposure to the instruments,MMF investors had little possibility to distinguish the MFFs that had.11In the third quarter of 2007,European enhanced MMFs lost a total of EUR 29bn (reprenting 20.8%of total asts under management (AuM))from investor redemptions (according to Lipper FMI).But while tho that held the better tranches or had low exposure to the most distresd gments managed to meet redemptions at reasonable cost,other were to take actions to avoid failure at the fund,ast manager or even parent bank level (e Table 1below).
4.2.The MMF respon:suspended redemptions and NAV haircuts
Luxembourg-Bad AXA Investment Management was first to reveal its troubles.The ast manager
reported substantial loss on two offshore enhanced money market funds.The funds,managed with the objective to produce returns 50basis points excess of Libor,had been verely hit by the fallout in the US subprime mortgage market.With around 40%of AuM allocated to subprime mortgages in the US,the funds began losing money in July,despite not being expod to the actual vintages that were downgraded (Johnson,2007;Tett,2007;Burgess,2007a ).
As conditions worned,between July 18and July 192007,the funds lost 13.45%and 12.6%respectively.On July 20,AXA issued a statement to calm investors.It emphasid that all the curities were still paying interest and principal as scheduled.AXA also emphasid that in terms of rating,less than 3%of AuM had been downgraded since originally issued,while over 16%had been upgraded.AXA blamed liquidity as the principal problem (AXA,2007).About a week later,AXA was forced to take more decisive action.To protect its brand reputation,AXA decided to purcha all shares from investors wishing to redeem at the prevailing NAV.The ast manager thereby accepted the full market risk of the funds ’EUR 740mn AuM.Simultaneously,subscriptions to the funds were cancelled (Schultes and Wilson,2007).
Next in line was French ast manager ODDO.Also quoting dif ficulties in valuing their enhanced MMFs and perceived differences between the intrinsic value of the underlying curities and the valu
e at which they were currently trading,ODDO suspended subscriptions and redemptions in the funds on 26July 2007.ODDO also announced that the funds were to be dissolved and their asts sold in two stages.Asts unaffected by the troubles were sold quickly.As a result investors were reimburd around 50%of their investment by September 6.Less liquid asts were to be divested over a suf ficient timeframe to ensure favourable market conditions.However,as the situation continued to worn,on September 17ODDO issued a guarantee that the initial investment of all its non-professional clients (houholds,associations and foundations)would be repaid.The expected loss on ODDO amounted to EUR 25mn (ODDO,2007a ,2007b ).
Shortly after,the dif ficulties of German enhanced MMFs surfaced.On August 3,Union Investment shut their EUR 950mn ABS-Invest MMF due to redemptions amounting to EUR 100mn.It was cited as
10The ABX Index is a ries of credit-default swaps bad on 20bonds that consist of subprime mortgages.It is widely considered a benchmark for the performance of subprime residential mortgage backed curities (RMBS).For excellent over-views of the performance of the ABX index during the crisis,e Gorton (2009)and Longstaff (2010).
11For instance,the average IMMFA fund has about 9%of AuM in FNRs and 35%in CPs (including ABCPs).Most of the funds had little or no exposure to troubled ABS:s.E.Bengtsson /Journal of International Money and Finance 32(2013)579–594michelle yeh
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