In the latest installment of the Salzburg Questions for the Future of Finance, we hear from Patrice Berge-Vincent, an independent consultant in policymaking for the asset management industry and the World Bank
This article is part of the Salzburg Questions for the Future of Finance series by the Salzburg Global Finance Forum
During World War II, examining the damage done to aircraft returned from missions, the US military recommended adding armor to the areas with the most damage. The statistician Abraham Wald, noting that the military only considered the aircrafts that had survived their missions, contradicted such conclusions. He explained the bullet holes in the returning aircraft represented areas where a bomber could take damage and still fly well enough to return safely to base.
All money market funds (MMFs) flew well enough through the March 2020 liquidity crisis. Still, policymakers such as the Financial Stability Board (FSB) should examine the damages to MMFs with this survivor bias story in mind. Instead of suggesting armoring the apparent damages, they should address the actual issues. March 2020’s events teach us two major lessons regarding MMF vulnerabilities.
Firstly, MMFs went on a mission with a fuselage painted in glowing yellow and a sign reading “shoot here.” Because they must consider the imposition of liquidity fees and gates if their weekly liquid assets (WLA) fall below 30 percent, MMFs were subject to artificially high levels of redemptions.
Industry data shows that, in March 2020, the MMFs that experienced the highest redemption pressure were those where this link existed. This linkage was ill-conceived and had unintended and damaging consequences in a period of market stress. Policymakers in the European Union and the United States should remove this link that served as an accelerant for redemptions as a top priority, considering they are the two most meaningful MMF markets globally.
Secondly, when missions intensified in treacherous conditions, MMF pilots were instructed to turn one engine off. Some supply bottlenecks made the airbase run out of kerosene. As everyone ran to the fuel tanks, some aircraft were left empty. Most vulnerabilities the FSB puts forward are inherent to the short-term funding markets (STFMs) and not vulnerabilities in the structure or frameworks of MMFs.
I agree with the FSB that, in March 2020, there was a lack of liquidity in commercial paper and certificates of deposit markets (secondary STFMs). However, the FSB falls short in identifying STFMs as an area requiring significant further analysis. A proper study of the STFMs needs to be a collaborative endeavor.
MMFs are one small player in the STFMs, and playing a role in the markets and reacting to market stresses should not be confused with causing such market stresses. Thus, instead of trying to constrict MMF investor redemptions, policymakers should address the STFM structure and functioning vulnerabilities.
MMFs play a significant role in the orderly functioning of the STFMs and serve valuable financial and economic functions for millions of investors and the capital markets more broadly. Accordingly, policy measures that eliminate or significantly decrease the size of the MMF sectors will substantially impair the resilience and orderly functioning of the STFMs.
MMFs proved resilient and performed as intended throughout last year’s liquidity crisis. All redemptions have been honored, and no MMFs have suspended redemptions, imposed fees and gates, or converted to variable net asset value (VNAV) form.
In short, we need to work smarter on solving the more impending challenges: eliminating the link between WLA requirements and potential fee or gate and the STFM reform. It is critically important that MMFs remain a viable product available for global investors.
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Patrice Bergé-Vincent is a global securities markets and asset management regulation policy and advocacy leader. Since February 2021, Patrice has served as an independent consultant for the asset management industry and the World Bank, helping its members – large emerging and growth countries – to improve their regulatory framework and develop their capital markets to the service of the real economy and citizens. Before that, Patrice directed ICI Global - the international program of the Investment Company Institute (ICI). Prior to joining the ICI, Patrice was a partner with PwC France, where he led the asset management regulatory practice and coordinated PwC’s central cluster (EMEA) asset management regulatory work. Earlier in his career, he worked at the Autorité des marchés financiers (AMF), the French financial market regulator, serving as head of the Asset Management Regulation Policy Division. During his tenure at the AMF, Bergé-Vincent chaired the IOSCO Committee 5, dedicated to collective investment schemes, and represented the AMF in the Investment Management Standing Committee of ESMA. Before that, he was seconded from the AMF to the Asset Management Unit of the then European Commission’s Directorate-General Internal Market and Services. Patrice is a graduate of the École nationale d’administration (ENA). He is a Salzburg Global Fellow.
The Salzburg Questions for the Future of Finance is an online discussion series introduced and led by Fellows of the Salzburg Global Finance Forum. The articles and comments represent opinions of the authors and commenters and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Tatsiana Lintouskaya: tlintouskaya@salzburgglobal.org
