Bank crisis puts money market funds back in the spotlight

By Kyle Campbell

Deposit flows after a pair of high-profile bank failures last month have renewed a debate about the Federal Reserve’s support of money market funds and whether that support harms banks.
Between March 8 and March 22, total commercial bank deposits declined by $300 billion, according to Fed data. During that same period, money market funds ticked up $238 billion…”The whole [ON RRP] facility should be unwound,” Karen Petrou, managing partner of Federal Financial Analytics, said. “Similarly, the Fed should stop sitting on trillions in bank deposits. It’s a huge distortion.”Historically, money market funds have increased the availability of credit by purchasing short term corporate loans — known as commercial paper — and Treasury bills, which are government bonds with maturities of less than one year. Funds still engage in this activity, but their ability to earn interest simply by engaging in these purchase agreements with the Fed diminishes their economic impact, Petrou said. “The Fed is supporting funds flowing out of the banking system, where they support macroeconomic activities, into the funds sector, then looping them back into the Fed where they support the Fed’s portfolio and government borrowing,” she said. “That’s a really altered state that nobody’s quite focused on.”