Money-market mutual funds, an alternative to bank accounts for individuals and companies, will test the resolve of the U.S. Federal Reserve and Treasury Department to prevent another financial crisis after the $2.6 trillion industry successfully lobbied against more regulation by the Securities and Exchange Commission.
Fed Governor Daniel Tarullo has said the central bank could tighten rules on banks’ borrowing from money-market funds, and Boston Fed President Eric Rosengren has said officials have the option to force banks to back their money funds with capital. The Fed and the Treasury could also work through the Financial Stability Oversight Council, a new regulatory panel formed under the Dodd-Frank Act, to seize oversight of money funds from the SEC and grant that power to the Fed.
FSOC faces technical and political hurdles to enacting new rules, said Satish Kini, a partner in Washington at the financial institutions group of law firm Debevoise & Plimpton LLP.
“There is much to be investigated related to the cash- management industry, as a whole, before a fruitful discussion can be initiated,” Aguilar said yesterday in a statement. “To move forward without this foundation is to risk serious and damaging consequences in contravention of the Commission’s mission.”
Industry executives said the plan would destroy the attraction of funds to investors and deny companies, cities and states a cheap source of short-term funding. Money funds can buy debt securities within 13 months of maturity, including short- term bonds issued by state and local governments and companies, as well as asset-backed securities typically issued by banks.
“We believe that fund shareholders and the economy benefit from the fact that there is no current plan for further regulation of money-market mutual funds,” Adam Banker, a spokesman for Fidelity Investments in Boston, said in an e- mailed statement.