U.S. Securities and Exchange Commission Chairman Mary Schapiro will tell a Senate panel today that money-market mutual funds are vulnerable to runs and must face rules to avoid taxpayer bailouts.
“Unless money-market fund regulation is reformed, taxpayers and markets will continue to be at risk that a money-market fund can transform a moderate financial shock into a destabilizing run,” Schapiro said in testimony prepared for a Senate Banking Committee hearing. “In such a scenario, policy makers would again be left with two unacceptable choices: a bailout or a crisis.”
Schapiro said lawmakers that money funds should be required to float their net asset values or increase their capital buffers. She also said that limits on redemptions could “further enhance a money-market fund’s resiliency.”
The five commissioners at the SEC are divided on whether and how to propose rules for money-market funds. The agency has been subject to a lobbying campaign by the U.S. Chamber of Commerce and other industry groups opposed to additional regulation.
Concern over money funds, once seen as among the safest of investments, grew after the September 2008 collapse of the $62.5 billion Reserve Primary Fund, triggering a broader run that contributed to a freeze in global financial markets. The run calmed after the Treasury Department temporarily guaranteed money-fund shareholders against losses and the Fed began buying fund assets at face value to help them meet redemptions.
The SEC responded in 2010 by introducing liquidity minimums, average maturity limits and new disclosure requirements. Speaking at an event today sponsored by the Exchequer Club of Washington, Commissioner Elisse Walter said there is a “serious question” about whether those rules would prevent future runs because they were mostly focused on liquidity requirements.
Walter, a Democrat, said she disagreed with an industry argument that the 2010 rules worked because no fund’s net asset value fell below $1 last summer as Congress debated whether to raise the U.S. debt ceiling.
“It was not the same type of event or magnitude of what happened during the financial crisis and there really weren’t credit issues that emerged,” she said.
Schapiro will repeat that point to the Senate panel. In her prepared testimony, Schapiro said investors withdrew about $100 billion from prime money-market funds during a three-week period that began June 14, 2011 compared to $300 billion in withdrawals during a few days in 2008.
“These are significant differences,” she said in the prepared remarks. “If there had been real credit losses last summer, the level of redemptions in some funds could very well have forced a money-market fund or funds to break the buck, leading to the type of destabilizing run experienced in 2008.”
Congressional Republicans have criticized Schapiro’s focus on regulation for money-market funds. House Financial Services Committee Chairman Spencer Bachus, an Alabama Republican, and Representative Jeb Hensarling, a Texas Republican, wrote a letter to Schapiro in April questioning her focus on money-market rules when the SEC hasn’t met most of the deadlines for rules required by the 2010 Dodd-Frank Act.
For more on the SEC chairman's Senate testimony, see Schapiro Faces Bipartisan Criticism.