The European Systemic Risk Board (ESRB) has published a policy recommendation aimed at increasing the resilience of money market funds. As the financial market turmoil of 2020 showed, the regulatory changes that followed the global financial crisis did not go far enough in terms of mitigating systemic risks in the money market fund sector. Consequently, the ESRB is now recommending policy reforms aimed at addressing the remaining sources of systemic risk, which will also reduce the need for central bank intervention in crisis situations.
The ESRB has published a detailed report explaining the economic rationale for its recommendation and providing an impact assessment for its main proposals. The report concludes that the recommended reforms would not prevent money market funds from performing their economic functions – i.e. providing short-term funding to issuers (mainly EU banks and non-financial corporations) and serving as cash management vehicles for investors. The report also identifies the main shortcomings of the short-term debt securities market in which money market funds operate.