Federal Reserve Staffers Say Mutual Funds Vulnerable to Runs

Mutual funds are vulnerable to runs that can spill over and cause problems in the broader financial system, according to a blog post published today on Liberty Street Economics by staffers at the Federal Reserve Bank of New York.

The authors, Nicola Cetorelli, Fernando Duarte and Thomas Eisenbach, argue that a run can occur when heavy withdrawals from a mutual fund cause the fund company to sell illiquid assets at fire sale prices. In that situation, the post said, investors will have an incentive to get their money out early, triggering a race for the door that can have a ripple effect beyond the original fund.