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Report
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Similar to the more traditional money market funds (MMFs), stablecoins aim to provide investors with safe, money-like assets. We investigate similarities and differences between these two investment products. Like MMFs, stablecoins suffer from “flight-to-safety” dynamics: we document net flows from riskier to safer stablecoins on days of crypto-market stress and estimate a discrete “break-the-buck” threshold of $1, below which stablecoin redemptions accelerate. We then focus on two specific stablecoin runs, in 2022 and 2023, showing that the same flight-to-safety dynamics also ...
Working Paper
The Shift from Active to Passive Investing : Potential Risks to Financial Stability?
The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift for financial stability through four different channels: (1) effects on investment funds? liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be ...
Report
Swing Pricing Calibration: A Simple Thought Exercise Using ETF Pricing Dynamics to Infer Swing Factors for Mutual Funds
This note uses pricing dynamics for exchange-traded funds that invest primarily in short-term debt to provide rough estimates of a range of swing-factor-proxies for mutual funds that invest in similar assets. These proxies could be useful for benchmarking stress-period swing factors in which mutual funds that invest substantially in short-term debt experience large net redemptions.
Report
Money Market Mutual Funds: Runs, Emergency Liquidity Facilities, and Potential Reforms
This note describes past runs on non-government money market mutual funds and official sector actions that were taken to stem the runs. In addition, it highlights other cash management vehicles that may have vulnerabilities similar to those of non-government MMMFs. Finally, it proposes that converting all non-government MMMFs into government MMMFs could substantially reduce the likelihood of future official sector support for MMMFs.
Report
Are retail prime money market fund investors increasingly more sensitive to stress events?
In this note, we examine the redemption activity of retail investors in prime money market funds, over two stress periods in 2008 and 2020. We find that, on average, retail investors’ redemptions during 2020’s stress period were substantially larger than those from 2008’s.
Discussion Paper
Runs on Stablecoins
Stablecoins are digital assets whose value is pegged to that of fiat currencies, usually the U.S. dollar, with a typical exchange rate of one dollar per unit. Their market capitalization has grown exponentially over the last couple of years, from $5 billion in 2019 to around $180 billion in 2022. Notwithstanding their name, however, stablecoins can be very unstable: between May 1 and May 16, 2022, there was a run on stablecoins, with their circulation decreasing by 15.58 billion and their market capitalization dropping by $25.63 billion (see charts below.) In this post, we describe the ...
Working Paper
The Shift from Active to Passive Investing : Potential Risks to Financial Stability?
The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift for financial stability through four different channels: (1) effects on investment funds’ liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be ...
Working Paper
Technology Providers and Financial Stability: Overview of Risks and Regulatory Frameworks
Technology-focused Third-Party Service Providers (TPSPs) have become important players in the operations of financial institutions and the financial markets. This paper summarizes the micro- and macro-prudential regulatory frameworks in place to address risks that TPSPs may pose to the financial system.
Discussion Paper
Liquidity Transformation Risks in U.S. Bank Loan and High-Yield Mutual Funds
Net assets in open-end (non-money market) mutual funds (MFs) have increased notably over the past decades.
Discussion Paper
Stablecoins and Crypto Shocks
In a previous post, we described the rapid growth of the stablecoin market over the past few years and then discussed the TerraUSD stablecoin run of May 2022. The TerraUSD run, however, is not the only episode of instability experienced by a stablecoin. Other noteworthy incidents include the June 2021 run on IRON and, more recently, the de-pegging of USD Coin’s secondary market price from $1.00 to $0.88 upon the failure of Silicon Valley Bank in March 2023. In this post, based on our recent staff report, we consider the following questions: Do stablecoin investors react to broad-based ...