1
$\begingroup$

I am researching the question, what happens during a crisis situation to the money market. Can it break?

In 2007-08 there is evidence that liquity hoarding from banks became a rather common problem. (See f.ex. Berrospide 2012)

I in a risk statement(which I cannot find anymore) that the ECB does not see the money market as a secure way to fund a bank in a crisis situation and somehow I interprete from this that it only sees itself as the real constant during a financial crisis.

Does the money market hold in a severe crisis situation?

I appreciate your experienced answers!

$\endgroup$
  • 1
    $\begingroup$ This question is a bit naive. The answers go back to Bagehot who wrote his book Lombard Street in 1873 econlib.org/library/Bagehot/bagLom.html and perhaps even earlier. Also, of course, a voluminous literature has appeared since 2008. $\endgroup$ – noob2 Nov 24 '15 at 14:07
3
$\begingroup$

Clearly the money markets are likely to freeze up in a crisis situation. They did exactly that in 2008. Specifically: A) people don't want to lend money unsecured to banks, so bank commercial paper goes below par in the market. B) understanding this , people try to liquidate money market funds containing bank cp at par, so a run develops on money market funds. C). Banks are then unable to roll their cp funding into new cp, so they must find other sources of funding when the cp matures.

There have been some changes which hopefully will decrease these effects next time there is s crisis: Banks have reduced their reliance on commercial paper and other short term funding. Also , there is legislation being considered that would require money market funds containing bank and corporate paper to maintain a nav instead of always being at par. However there isn't much doubt that the money market will be under pressure whenever there's a credit crisis.

$\endgroup$
1
$\begingroup$

The money market fund could suffer principle loss during crisis and one of them publicly did during the crisis of 2008. I say publicly because there are funds that suffered large loss that would have had them 'break the buck' except their sponsoring organizations bailed them out. I urge you you check out this New York Fed research for a comprehensive look at this topic. http://libertystreeteconomics.newyorkfed.org/2013/10/twenty-eight-money-market-funds-that-could-have-broken-the-buck-new-data-on-losses-during-the-2008-c.html#.VlSeC7__wWA

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.