Shadow Banking: May 2010 Archives

by Philipp Schnabl and Marcin Kacperczyk

Money market funds are the stepchild of finance. Even though they manage more than $4 trillion in assets, you won't find them in the Senate's financial reform bill from last Thursday . Is this justified?

If you analyze the track record of money market funds up to 2007, you would think that the Senate bill got it right. Apart from a small hiccup in the early 1990s, not a single fund ever got into trouble. However, in August 2008, a large money market fund, the Reserve Primary Fund, went bankrupt. As a result of the Reserve Primary Fund's troubles, investors started pulling their money from the entire industry.

Faced with a panic, the government decided to act promptly. Three days after the start of the run, it announced that all money market funds would be guaranteed. This announcement successfully stopped the run, but it also meant that going forward investors expect to get bailed out again.

We therefore believe that the government has to explicitly acknowledge that money market funds will receive government support during times of crisis. Even though this may be unpopular in policy circles, this is an honest thing to do. How should the government do this? This blog post has the answer.


The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors