Fed’s Rosengren Says Banks’ Money Market Funds Need Tests
Federal Reserve Bank of Boston President Eric Rosengren said so-called stress tests of banks, used to see how they would fare in an economic slump, should encompass money-market funds that are affiliated with them.
There has been a “pattern of support” for mutual funds by the banks that sponsor them, “without an explicit recognition that such funds can be a capital drain” on the banks during times of stress, Rosengren said today in remarks prepared for a speech in Amsterdam. He didn’t discuss the outlook for monetary policy or the economy.
Rosengren said stress tests, which are used by the Fed to gauge the health of the nation’s largest banks, would “make clear that money-market mutual funds with well-capitalized sponsors are likely to be less risky than those that do not have well-capitalized sponsors,” he said.
Regulators have worked for nearly four years to toughen the rules governing the $2.5 trillion industry, concerned that money funds are vulnerable to runs and pose a threat to financial market stability. Changes proposed by U.S. Securities and Exchange Commission Chairman Mary Schapiro that would force funds to abandon their traditional $1 share price or adopt capital cushions lack enough support among the four other commissioners to win approval.
Once considered among the safest investments, money-market funds have been a focus of regulators since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered a broader run on money funds, contributing to a freeze in global credit markets. In its initial response to the Reserve Primary collapse, the SEC adopted rules that imposed liquidity minimums on money-market funds, tightened average maturity limits, raised credit-quality standards and added new disclosure requirements.
Rosengren’s district is home to Fidelity Investments, the nation’s largest provider of money-market mutual funds with $403 billion of assets at the end of May, according to research firm Crane Data LLC. Fidelity isn’t affiliated with a bank. Fidelity’s biggest rival is New York-based JPMorgan Chase & Co., which runs funds that have assets totaling $247 billion.
Ianthe Zabel, spokeswoman for the Investment Company Institute, which represents bank-owned and non-bank fund providers, declined to comment.
Rosengren, 54, backed Schapiro’s proposals while saying it’s unclear they’ll be adopted. She can count on only one supporting vote on the commission, from Elisse B. Walter.
“I am very supportive of the current push within the SEC for additional reforms,” Rosengren said. In the absence of those measures, he said, it would be helpful to focus on bank- sponsored money funds, which hold just over half of all U.S. money fund assets.
“Based on the historical experience of their money-market funds, the historical experience of similar funds, and their money-market funds’ exposures, sponsors could calculate the likely capital support needed from the organization in a stress scenario,” he said at the Conference on Post-Crisis Banking hosted by the central bank of the Netherlands.
“This is an admittedly partial approach,” Rosengren said, adding that it “would at least make more banking organizations more resilient.”
Schapiro told the Senate Banking Committee on June 22 that the agency has found at least 300 examples of money fund sponsors stepping in to provide or line up capital support to prevent the funds from breaking the buck.
Rosengren said stress tests can be expanded to help protect the financial system from risks other than individual bank failures. In its annual stress tests, the Fed evaluates how banks would fare in an adverse economic scenario and whether they may need more capital.
“Increasing the focus of stress tests beyond safety and soundness of individual institutions to more systemic concerns and implications -- such as how markets and institutions behave during periods of stress -- is an under-researched area that deserves more attention,” Rosengren said.
Stress tests could also be used to assess vulnerabilities from broker-dealers, he said.
“More work needs to be done on the implications of potential crisis-related stresses at broker-dealers that do not have access to liquidity facilities,” Rosengren said.
Rosengren was formerly the head of banking supervision and regulation at the Boston Fed. He became president its president in 2007.
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