Treasury, Fed looking at new ways to oversee money market funds


U.S. Treasury Secretary Timothy Geithner leads the Financial Stability Oversight Council. (JONATHAN ERNST/REUTERS)

Ever since the $2 trillion money market fund industry nearly blew up during the financial crisis, government regulators have looked wearily at the sector, worried that its promises to give savers better returns with virtually no risk could cause surprise losses and spark panic.

This week it was the regulators who were surprised when the Securities and Exchange Commission, which has primary authority over the funds, said it was dropping a plan to more tightly regulate them.

That left the Treasury Department and the Federal Reserve, which have expressed significant concerns about the industry, searching for other ways to impose new rules on money market funds.

The issue may come up as soon as next month when the Financial Stability Oversight Council, created after the financial crisis, meets. The FSOC is led by Treasury Secretary Timothy F. Geithner, who has advocated tougher oversight of the industry.

“Treasury is in the process of consulting with the Federal Reserve Board, the Securities and Exchange Commission and other regulatory agencies to consider the appropriate next steps to reduce risks to financial stability from money market funds,” Treasury spokeswoman Suzanne Elio said in a statement.

Money market funds offer investors a way to store cash with a slightly better return than an ordinary savings account. Though not risk-free, many investors assume they have no chance of losing money.

One major fund, the Reserve Fund, nearly collapsed in the 2008 financial crisis and was unable to return all of its investors’ money, leading to a panic and a major new government guarantee that investors would be repaid. The guarantee expired in September 2009.

Money market funds play a major role in the country’s “shadow banking” system — the range of financial services and investments that are in widespread use across the economy but lack the oversight normally applied to traditional banks.

Money market funds play an important role because, in addition to being a place where investors put their money, they often provide short-term loans to banks and make other types of investments.

In 2010, the SEC took a first stab at more tightly regulating money market funds, passing rules that required money market funds to take far fewer risks with what they did with customers’ money. But many regulators deemed even those new rules inadequate.

The SEC went to work on a second plan pushed by Chairman Mary Schapiro and opposed by the two GOP commissioners.

Under Schapiro’s plan, one option for tightening oversight would have involved requiring funds to set aside reserves for crises, which would cut into profits, and not allowing customers to withdraw their money during a panic. A second would have required funds to allow the value of a share of a money market fund — usually $1 — to fluctuate with the value of the fund’s holdings.

The current fixed share price of $1 could give the false impression to investors that their money is secure, so taking that away might have made the funds less attractive.

The money market fund industry aggressively opposed the changes. It appeared to be headed for approval until Democratic Commissioner Luis Aguilar announced he would vote against the plan, citing concerns about whether it would destabilize the industry.

Still, the industry may come under new oversight, though in more limited ways. One option would be for the Fed to designate the largest money market funds as systemic risks, using powers it obtained from Congress after the financial crisis. The Fed would then have authority to impose new constraints on the funds.

Another option would be for the Fed and other regulators to limit how much money banks can borrow from money market funds.

Zachary A. Goldfarb is policy editor at The Washington Post.
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