General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
October 31, 2017

OFR published a working paper examining the intersection of U.S. money market mutual fund (MMF) reforms, bank liquidity requirements, and the federal home loan bank (FHLBank) system. The paper examines the risks resulting from this linkage, including the potential for vulnerability of this funding model to "runs."

The paper highlights the impact of the SEC’s 2014 reforms on the money market industry and the broader money markets. It also describes the landscape for FHLBanks and examines the potential implications of money market fund industry’s increased holdings of their debt. The paper argues that intersection of MMF reforms and liquidity coverage ratio has contributed to the FHLBanks’ increased reliance on short-term funding to finance relatively longer-term assets, primarily collateralized loans to its largest members.This funding model could be vulnerable to “runs” and could impact financial markets and financial institutions in ways that are difficult to predict.

Analysis of regulatory filings by FHLBanks finds that this increased funding is largely used to subsidize regulatory liquidity requirements to the largest U.S. banks. FHLBanks are increasingly serving as a link between money market funds and the largest U.S. banks, which may generate new unintended vulnerabilities to the U.S. financial system. Although a low probability event, potential risk channels include a run on FHLBanks’ liabilities due to uncertainties about their government-sponsored enterprise, or GSE, status, operational issues that limit the FHLBanks’ ability to rollover its debt, or other events that cause a rapid shift in investor preferences. The paper concludes that prospect of such an event warrants close monitoring, as it could impact the broader financial markets in ways that are difficult to predict. The Federal Housing Finance Agency, or FHFA, is aware of this increased maturity mismatch and is taking steps to reduce the system’s reliance on short-term funding, including its plan to issue proposed liquidity risk management rules by year-end. 


Related Link: Working Paper (PDF)

Keywords: Americas, US, Banking, Money Market Funds, FHLBank System, Shadow Banking, Systemic Risk, Liquidity Risk, Maturity Mismatch Risk, FHFA, OFR

Related Insights

US Agencies Propose Revisions to FFIEC Reports 031, 041, 051, and 101

US Agencies (FDIC, FED, and OCC) propose to extend for three years, with revision, FFIEC 031, FFIEC 041, FFIEC 051, and FFIEC 101.

February 21, 2019 WebPage Regulatory News

OFR Adopts Data Collection Rule on Centrally Cleared Repo Transactions

OFR adopted a final rule to establish a data collection covering centrally cleared funding transactions in the U.S. repurchase agreement (repo) market.

February 20, 2019 WebPage Regulatory News

FHFA Finalizes Rule on Federal Home Loan Bank Capital Requirements

FHFA published, in Federal Register, the final rule to adopt, as its own, portions of the regulations of the Federal Housing Finance Board pertaining to the capital requirements for the Federal Home Loan Banks.

February 20, 2019 WebPage Regulatory News

PRA Publishes PS4/19 on Loss-Absorbency Mechanism Under Solvency II

PRA published a policy statement (PS4/19) that provides feedback on responses to the consultation paper (CP27/18) on adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down under Solvency II.

February 20, 2019 WebPage Regulatory News

SRB Publishes Framework for Performing Valuations in Resolution

The framework provides independent valuers and the general public with an indication of the expectations of SRB on the principles and methodologies for valuation reports, as set out in the legal framework.

February 19, 2019 WebPage Regulatory News

BIS Paper on Effect of Securities Lending on OTC Market Liquidity

BIS published a working paper that studies how securities lending affects over-the-counter market (OTC) liquidity.

February 19, 2019 WebPage Regulatory News

US Agencies Extend Consultation Period for the Proposed SA-CCR

US Agencies (FDIC, FED, and OCC) extended the comment period for a proposed rule to update their standards for how firms measure counterparty credit risk posed by derivative contracts.

February 18, 2019 WebPage Regulatory News

FED Extends Consultation Period for Stress Testing Rule

FED has published in the Federal Register a notice proposing amendments to the company run and supervisory stress test rules.

February 15, 2019 WebPage Regulatory News

EBA Single Rulebook Q&A: Third Update for February 2019

EBA published answers to two questions under the Single Rulebook question and answer (Q&A) updates for this week.

February 15, 2019 WebPage Regulatory News

SEC Proposes Rule on Risk Mitigation Techniques for Uncleared SBS

SEC proposed a rule that would require the application of specific risk-mitigation techniques to portfolios of security-based swaps (SBS) that are not submitted for clearing.

February 15, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2623