(Bloomberg News) Federal Reserve officials spoke out twice in the past month to send a signal to money-market funds resisting tighter U.S. regulation. The message: New rules are coming, one way or another.
The officials -- Governor Daniel Tarullo and Bank of Boston President Eric Rosengren -- said the Fed could take steps to limit banks' reliance on money funds as a source of short-term cash.
The U.S. Securities and Exchange Commission has been deadlocked for months over proposed rules that would require the $2.5 trillion money-fund sector to float share prices or hold more capital, measures that could make funds less attractive to investors.
The comments were "an effort to tell the industry to work with the SEC because, 'If they don't get you, we can,'" said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm.
In a speech in the Netherlands, Rosengren said the Fed's stress tests should be expanded to include money funds in their calculations.
"Based on the historical experience of their money-market funds, the historical experience of similar funds, and their money-market funds' exposures, sponsors could calculate the likely capital support needed from the organization in a stress scenario," he told the Conference on Post-Crisis Banking on June 29.
Rosengren's comments followed remarks from Tarullo on June 12 supporting the SEC's proposals. At the same time, he said regulators have other options if the SEC is unable to impose a rule.
"In the absence of such action, there are several second- best alternatives," Tarullo said. One option is that bank "supervisors consider setting new limits on banks' reliance on funding provided by money-market funds."
The signals are not limited to the U.S. Paul Tucker, deputy governor of the Bank of England, has said European regulators might take similar action to limit their banks' exposure to U.S. money funds if the SEC doesn't act.
The SEC's five commissioners have received a 337-page staff proposal that would offer funds a choice of either floating the share price or holding more capital. An SEC vote could come as soon as this month to proceed on the rule by asking for public input.
Fed spokeswoman Barbara Hagenbaugh and John Nester, an SEC spokesman, declined to comment.
SEC Chairman Mary Schapiro and other regulators have repeatedly said that money-market funds are vulnerable to runs during times of crisis when investors rush to redeem shares. They cite the example of the $62.5 billion Reserve Primary Fund, which collapsed in September 2008, contributing to a system-wide credit freeze. The U.S. Treasury Department stepped in to guarantee the funds and stabilize the system.
In 2010, the SEC increased liquidity requirements for the funds as a stopgap measure to prevent further bailouts. All the same, money-market funds can and do lose money, forcing their sponsors to make up the difference. The biggest U.S. money funds are sponsored by Fidelity Investments, Vanguard Group Inc. and JPMorgan Chase & Co., with assets of more than $100 billion each.
Schapiro told the Senate Banking Committee on June 22 that the agency has found at least 300 examples of money-fund sponsors stepping in to provide or line up capital support to prevent the funds' share price from falling below the guaranteed $1, called "breaking the buck." Three of those instances, she said, happened after the SEC imposed the 2010 liquidity rules.