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Journal of Banking & Finance Vol. 179 2025

Money Market Funds vulnerabilities and systemic liquidity crises

Michel Baes1; Antoine Bouveret2; Eric Schaanning3,4

1 Zurich University of Teacher Education · 2 European Securities and Markets Authority, Paris, France · 3 Nordic Institute of Asian Studies · 4 Nordisk Fond for Miljø og Udvikling

Abstract

Despite regulatory reforms, Money Market Funds (MMFs) experienced severe stress in March 2020, following large redemptions and dislocations in short-term markets. We provide a model showing the trade-offs between liquidity and capital preservation services offered by MMFs. We show that in a crisis, MMFs cannot provide liquidity and capital preservation to investors at the same time. As a result, investors have an incentive to run pre-emptively. We calibrate our model on data from USD MMFs and find that most funds would have been unable to meet redemptions above 30% mid-March 2020. Unless short-term funding markets are made resilient in times of stress, MMFs will face similar challenges during future liquidity crises.

DOI
10.1016/j.jbankfin.2025.107530
Volume
179
Pages
107530
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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