MutualFundWire.com: Yellen Sees Structural Vulnerabilities In Mutual Funds

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Thursday, March 30, 2023

Yellen Sees Structural Vulnerabilities In Mutual Funds

A member of President Biden's cabinet is arguing she should gain more oversight of money market funds and other mutual funds, and a fundster trade group is pushing back.

Janet Louise Yellen
United States
Secretary of the Treasury

Last night, in a speech for the National Association for Business Economics' 39th annual Economic Policy Conference, U.S. Treasury Secretary Janet Yellen called out the asset management industry (specifically money markets and other open-end mutual funds) for the "structual vulnerabilities" at the heart of the industry. (Yellen also took aim at hedge funds and cryptocurrency.)

"The financial stability risks posed by money market and open-end funds have not been sufficiently addressed," Yellen stated.

The folks at the Investment Company Institute (ICI), a mutual fund industry trade group, are pushing back, noting that it's ironic to hear calls for greater regulation of non-bank financial institutions (like asset managers) "in the middle of a bank crisis."

Last month, Eric Pan, ICI's president and CEO, argued that the Financial Stability Board (FSB) "should rethink its agenda on non-bank financial intermediation."

"Regretfully work on non-bank financial institutions (NFBI) has disproportionately focused on the activities of open end funds — the most transparent and regulated segment of NBFI — and has neglected serious examination of less regulated NBFI segments as well as the critical challenges relating to the supply of liquidity," Pan stated.

In her speech last night, Yellen noted that bond funds suffered $255 billion (a record) in net outflows in March 2020, during the market volatility as the COVID-19 pandemic hit the U.S. in a big way. Yet the ICI team has pushed back time and again.

What regulators from the banking side seem to regularly ignore, when trying to treat asset managers like banks and when lumping mutual funds together with hedge funds, is that mutual funds' use of leverage is limited, which limits the magnification effect of losses and thus helps tamp down any bank-run-like behavior. Hedge funds and banks, on the other hand, often use leverage in a big way, magnifying losses and increasing the incentive for scared customers to rush for the exits when times are tough.

Other regulators' interest in going after money funds (and asset managers in general) has been a recurring theme for much of the past 15 years (i.e. since the 2008 financial crisis).

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