The Bank for International Settlements has published research on how asset price bubbles affect systemic risk in the money market fund sector, based on a sample of more than 3,500 US dollar-denominated money market funds from 2004 to 2022. The paper finds that large funds and government money market funds are generally associated with lower systemic risk in normal periods, while prime money market funds contribute more to financial fragility. It also finds that the risk impact of money market funds depends on market conditions, with fund growth becoming more destabilising during episodes of equity market exuberance. Using real-time bubble detection for US equity and real estate markets alongside fund-level systemic risk measures, the research finds that growth in large money market funds can amplify systemic risk during equity booms even though larger funds are usually associated with lower risk outside bubble periods. Government money market funds, which invest exclusively in US Treasury securities, are linked to lower systemic risk, while prime funds are riskier because they invest in instruments such as commercial paper and certificates of deposit. The paper also finds that offshore US dollar-denominated money market funds behave similarly to US-domiciled funds, suggesting limited diversification benefits during periods of financial stress. The findings support closer monitoring of money market fund growth and portfolio composition within macroprudential surveillance frameworks.

Original source Back to tracker