The conservatives and liberals, driven by a loud minority in their group imposing its will, are missing an important chance to contribute to a strictly regulated financial sector across Europe – argues Saïd El Khadraoui MEP
As an important pillar of the whole so-called ‘shadow banking sector’, money market funds are mutuals that invest in short-term debt such as money market instruments issued by banks, governments or corporations. Money market instruments traditionally include treasury bills, commercial paper or certificates of deposit. The MMFs can be denominated in any particular currency; those domiciled in Europe mostly invest in debt denominated in euros, pounds sterling or US dollars.
These MMFs are an important source of short-term financing for financial institutions, corporate bodies and governments. For example, almost 40 per cent of short-term debt issued by the banking sector is held by MMFs. They represent a crucial link bringing together demand and offer for short-term money.
On the demand side, they are mainly used by corporate treasurers seeking to invest excess cash for short periods of time. With total assets under management of roughly €1trillion, MMFs represent around 15 per cent of the European fund industry. They are popular with investors because they offer features akin to bank deposits: instantaneous liquidity and stability of value. However these characteristics cannot be maintained during stressed market conditions. The consequence is that investors redeem at the slightest hint of trouble, triggering so-called ‘investor runs’.
Due to the size of MMFs and their central place in the short-term funding market, investor runs tend to destabilise the overall operation of the money markets and therefore the financing of the ‘real’ economy. Runs also affect those institutions that sponsor MMF – banks and, as a last resort, governments and central banks.
In September last year, the European Commission took a first step by putting a proposal to regulate MMFs on the table. The whole idea behind the proposal is making these funds more liquid and more stable by imposing strict liquidity requirements, diversification requirements and a capital buffer on a particular type of MMF – namely constant net asset value funds or ‘CNAVs’. This capital buffer is the key issue in the debate. As a rapporteur, I believe that such a buffer is the right instrument. This is also the line defended by European Central Bank President Mario Draghi last week as head of the European Systemic Risk Board.
Despite the importance of such a capital buffer for reasons of financial stability, a small minority of conservatives and liberals fiercely opposes to this; fearing the costs of such a buffer will be too high for the CNAVs. This very vocal minority of members of the conservative and liberal party, clearly serving the interests of the financial industry, manages to impose its will and to block any proper reform of the MMF sector. Their priority is crystal clear: leave the MMF sector unregulated and keep the status quo. After the financial crisis and all the runs of investors we have experienced with these funds, in the European Union and in the United States, and after all the appeals of international and European organisations to urgently regulate this sector – we are sure this is not at all the way to follow.
None of the arguments used by the defenders of the CNAVs make any sense. Figures show clearly that a big majority of the CNAVs and MMFs will not move out of the EU once a capital buffer is imposed. Further, as a rapporteur, I proposed the buffers being built up in five years instead of three with a review after three years. Finally, the remedies the conservatives and liberals propose to tackle financial instability, by imposing liquidity fees, have proven to be insufficient during the crisis. By opposing proper reform of the MMF sector and blocking the vote for the third time – of the file in economic and monetary committee – the conservatives and liberals, driven by a loud minority in their group imposing its will, are missing an important chance to contribute to a strictly regulated financial sector across Europe.
Saïd El Khadraoui MEP is a member of the Socialists and Democrats group and banking sector negotiator on behalf of the European Parliament