U.S. Chamber Paper Finds Money Market Fund Reform Could Increase Systemic Risk

Sunday, June 17, 2012 - 8:00pm

Potential Reforms Could Shrink the Industry to the Detriment of Main Street Business, State and Local Governments

 WASHINGTON, D.C.—The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) released today a white paper titled, “Money Market Mutual Fund Reform: The Dangers of Acting Now”, which examines the impacts of possible reforms to money market mutual funds (MMMFs) on businesses, municipalities, individual investors and the overall economy.

The paper, authored by Georgetown University Professor James J. Angel, finds that contemplated reforms intended to reduce the chance of runs on MMMFs could, in fact, have the opposite effect and increase systemic risk.  Reforms could have far reaching consequences well beyond the fund industry.

The paper warns that the dangers of acting now include:

-  Shrinking and fundamentally altering the MMMF industry
-  Significantly higher interest rates for issuers of commercial paper 
-  Higher costs for state and local governments, pressuring them to increase taxes
-  Higher borrowing costs for corporations and governments, dampening economic recovery
-  An increase in systemic risk and pressure on capital adequacy for big banks
-  Decreased yields for retail investors.

“The reforms currently under consideration by regulators will undermine the utility and effectiveness of MMMFs, impeding businesses’ ability to raise short-term capital and manage daily cash flow,” said David Hirschmann, president and CEO, of CCMC. “We hope this paper will assist policymakers and regulators as they answer a few simple questions about reforms: Why now? Why these proposals? And why is additional regulation needed.”

The potential impact of additional reforms on MMMFs will be one aspect of the larger discussion at CCMC’s event on Wednesday, June 20.  “Cumulative Impacts of Financial Regulation: Are We Hindering Economic Recovery?” will examine not only proposed MMMF reforms but also pending regulations regarding derivatives, the Volcker Rule and capital standards.  The agenda is available here.

Since its inception in 2007, the Center for Capital Markets Competitiveness has led a bipartisan effort to modernize and strengthen the outmoded regulatory systems that have governed our capital markets. The CCMC is committed to working aggressively with the administration, Congress, and global leaders to implement reforms to strengthen the economy, restore investor confidence, and ensure well-functioning capital markets.

The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations.