1. Money Fund Runs Russ Wermers, University of Maryland Presentation at Bocconi University Milan Tuesday, January 05, 2016

2. Money Fund Runs Relevance of Money Market Mutual Funds As “Shadow Banks” At the end of 2009: 705 money funds 303 “prime funds” 1,849 shareclasses total; 794 shareclasses in “prime funds” $3.3 trillion in assets under management $1.1 trillion government funds $1.8 trillion non-government funds $0.4 trillion tax-exempt funds About 35% is held by retail investors (over $1 trillion) By comparison, M1=$1.8 trillion January 5, 2016Slide #2

3. Portfolio Holdings of Prime Money Funds (%) Money Fund Runs Year Total net assets Millions of dollars U.S. Treasury bills Other Treasury securities U.S. government agency issues Repurchase agreements Certificates of depositEurodollar CDs Commercial paperBank notes 1 Corporate notes 2 Other assets 3 Average maturity Days 1984$157,9515.9%0.8%4.1%3.3%13.6%12.0%47.2% –– 13.1%42 1985151,849 4.61.06.13.110.010.255.4 –– 9.5 42 1986164,610 3.61.63.64.410.011.656.0 –– 9.3 42 1987187,087 1.00.96.54.816.28.952.3 –– 9.4 34 1988210,897 1.00.22.8 15.214.154.6 –– 9.4 32 1989283,939 1.30.82.02.814.49.362.3 –– 7.1 43 1990305,189 4.42.24.72.96.98.965.5 –– 4.7 48 1991314,346 5.72.94.23.710.66.960.1 –– 5.8 56 1992300,310 2.72.57.54.910.46.957.7 –– 7.4 59 1993312,701 2.62.411.95.98.03.252.6 –– 13.3 58 1994352,972 2.41.311.45.66.44.553.4 2.4% – 12.7 38 1995449,829 1.40.99.26.28.94.552.53.7 – 12.7 60 1996543,134 0.71.88.95.112.74.350.72.3 – 13.5 56 1997650,111 0.50.75.45.314.73.751.83.2 – 14.8 57 1998857,340 0.60.89.54.612.93.648.53.9 5.8% 9.7 58 19991,082,906 0.50.36.84.812.83.949.03.18.410.4 49 20001,256,715 0.50.16.24.311.66.550.33.610.46.6 53 20011,578,652 0.60.312.46.314.87.241.31.510.94.6 58 20021,549,498 1.50.312.18.313.76.939.71.411.94.3 54 20031,354,908 1.50.415.28.411.55.135.22.016.14.8 59 20041,223,488 0.50.112.28.813.95.733.52.617.75.0 41 20051,306,698 0.80.14.212.414.35.938.12.317.74.2 38 20061,563,423 0.2 3.110.613.74.339.12.221.35.3 49 20071,884,132 1.00.23.311.914.95.436.43.916.56.4 44 20081,873,040 2.00.513.28.721.24.733.73.19.23.8 47 20091,854,287 2.71.210.08.630.85.327.62.86.24.7 50 January 5, 2016Slide #3

4. Money Fund Runs The Public Perception of Money Funds Small investors use as a substitute for a checking account to obtain higher yield Most investors believe that money funds have at least some implicit backing by the fund complex January 5, 2016Slide #4

5. The Events of September 2008 9/15/2008: Lehman Brothers declared bankruptcy 9/16/2008: Reserve Primary Fund held 1% Lehman securities Allegations by Ameriprise that institutional investors were “tipped off” Reserve allowed redemptions at $1 per share prior to 3 pm; closing 4 pm NAV = $0.97 per share (now Lehman securities have 3% impact) Fund went from $62.6 billion on 9/12 to $23 billion on 9/16 Money Fund RunsJanuary 5, 2016Slide #5

6. The Events of September 2008 9/19/2008: Treasury announces that it will guarantee certain money fund assets Sets up voluntary insurance program for money funds with a NAV of at least $0.995 as of 9/19/2008 Insurance is triggered when NAV falls below $0.995 Money Fund RunsJanuary 5, 2016Slide #6

7. Money Fund RunsJanuary 5, 2016Slide #7

8. Money Fund RunsJanuary 5, 2016Slide #8

9. January 5, 2016Money Fund RunsSlide #9

10. Money Fund Runs New SEC Rules on Money Funds (Phased in during 2010) Improved Liquidity: 10% of portfolio must be easily convertible to cash within one day; 30% within one week Higher Credit Quality: Maximum of 3% of portfolio in “Second Tier” securities (down from 5% previously) Max of 0.5% in single issuer Less than 45 days maturity Weighted-avg maturity less than 60 days (down from 90 days) January 5, 2016Slide #10

11. New SEC Rules on Money Funds (Phased in during 2010) “Know your investor” Requires funds to forecast the risk of large redemptions based on clientele Periodic “stress tests” required (analysis of risk) Funds required to analyze credit risk of each security purchased beyond simple outside ratings Collateral for repos must be cash or govt securities Funds must disclose portfolios monthly on website Money Fund RunsJanuary 5, 2016Slide #11

12. Past Research on Bank Runs Diamond and Dybvig (1983) Self-fulfilling bank run is equilibrium Postlewaite and Vives (1987) Extend DD to show that a run can occur in a given bank even if there is no information on the probability of that bank’s failure Goldstein and Pauzner (2005) and Jacklin and Bhattacharya (1988) Model information-based bank runs Money Fund RunsJanuary 5, 2016Slide #12

13. Money Fund Runs Contributions of Our Study Examine the money fund “panic” of September 2008 Which funds and which investors had correlated outflows? Deep pocket vs. shallow pocket complexes Liquid vs. illiquid funds Institutional vs. retail investors Was this a pure DD panic, or were some of the redemptions based on information? January 5, 2016Slide #13

14. Money Fund Runs Money Fund Data Extensive panel dataset of the vast majority of money market mutual funds December 31, 1997-June 30, 2009 data from iMoneyNet Daily total net assets (TNA) of individual shareclasses Money funds that predominantly cater to institutional investors Money funds that predominantly cater to retail investors Some holdings statistics: % Maturing within 7 days % Treasurys % Commercial paper % “First Tier,” “Second Tier” holdings January 5, 2016Slide #14

15. Category Level: VAR Analysis (Pre-Crisis Period, prior to 8/1/2008) January 5, 2016Money Fund RunsSlide #15

16. Category Level: VAR Analysis (Crisis Period, September 2008) January 5, 2016Money Fund RunsSlide #16

17. Do Runs Occur at Complex Level? Analysis Legal pooling is at fund level, not complex level However, implicit guarantee could create externalities between funds at complex level Also, similar portfolio holdings between funds within a complex may add further externalities Outflow-induced price pressure At complex level, we can uniquely analyze exchanges from Govt to Prime Funds (and the reverse) January 5, 2016Money Fund RunsSlide #17

18. Measure of Exchanges True exchanges not available A conservative estimate of exchanges: If prime and govt aggregate net flows are same direction (both positive or both negative), assume no exchanges occur If they run counterflow (one positive, one negative), assume the smallest (absolute value) is the correct exchange amount January 5, 2016Money Fund RunsSlide #18

19. Complex Level: Exchanges (Panel OLS) January 5, 2016Money Fund RunsSlide #19

20. Complex Level: Exchanges (Panel OLS) January 5, 2016Money Fund RunsSlide #20

21. Complex Level: Exchanges (Panel OLS) January 5, 2016Money Fund RunsSlide #21

22. Complex Level: Exchanges (Panel OLS) January 5, 2016Money Fund RunsSlide #22

23. Complex Level: Exchanges (Panel OLS) January 5, 2016Money Fund RunsSlide #23

24. Complex Level: Exchanges (Panel OLS) January 5, 2016Money Fund RunsSlide #24

25. Fund Level (Panel OLS) January 5, 2016Money Fund RunsSlide #25

26. Fund Level (Panel OLS) January 5, 2016Money Fund RunsSlide #26

27. Money Fund Runs Summary September 2008 period unique for study of “bank runs” Prime funds exhibit many characteristics of runs Most severe correlations in flows for funds catering to institutions Some correlation in flows for retail funds Funds with more liquid holdings exhibit less correlation An information effect rather than pure panic? Biggest influence on investor flow appears to be other same-complex funds in the same category (as opposed to other outside-complex funds in the same category) An information effect rather than pure panic? January 5, 2016Slide #27