(Bloomberg News) William C. Dudley, president of the Federal Reserve Bank of New York, said new rules are needed to protect the financial system from a run on money-market mutual funds, lending his support to a regulatory overhaul proposed by U.S. Securities and Exchange Commission Chairman Mary Schapiro.
"A glaring vulnerability exists with money-market mutual funds," Dudley wrote today in a Bloomberg View column. "Money funds should have capital buffers and modest limits on investor withdrawals. Such reforms are necessary to protect the economy from financial instability in the future."
Capital cushions and redemption restrictions are part of Schapiro's plan to bolster money-fund regulation. She has so far failed to win enough backing among her four fellow commissioners, who may vote as early as this month on whether to ask for public comment or kill the proposal.
Any of 105 U.S. money funds with combined assets of about $1 trillion could have been forced below its $1 share price by a single default among its 20 biggest borrowers, Dudley wrote in the column, citing Treasury data.
The number of vulnerable funds increased to 219 if a default occurred among any fund's top 10 borrowers, according to the annual report of the Treasury's Office of Financial Research published last month. The study assumed 40 percent recovery on all unsecured lending and full recovery on a fund's repurchase agreements.
Industry Opposition
Federal Reserve Bank of Boston President Eric Rosengren has also publicly supported Schapiro's plan. Other prominent supporters include Treasury Secretary Timothy F. Geithner; his predecessor, Henry Paulson; and former Fed Chairman Paul Volcker.
They are opposed by the funds industry, which has lobbied against the proposal; the U.S. Chamber of Commerce; and lawmakers including Senator Patrick Toomey, a Pennsylvania Republican.
Regulators have worked to make money funds more stable since the September 2008 collapse of the $62.5 Reserve Primary Fund. Its closing after its share price "broke the buck" by falling below $1 triggered a wider run on funds that helped freeze global credit markets. The withdrawals abated after the Treasury Department guaranteed shareholders against losses for a year and the Federal Reserve began buying securities at face value to help funds meet redemptions.
Withdrawal Limits