Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry

Ramin P. Baghai, Mariassunta Giannetti, and Ivika Jäger

How does the structure of financial intermediaries’ liabilities affect their asset holdings? We investigate the consequences of the 2014 money market fund (MMF) reform, which imposed redemption gates and liquidity fees on prime MMFs and forced prime funds marketed to institutional investors to switch from constant to floating net asset value. These changes made prime MMFs’ liabilities less money-like. As a consequence, the affected MMFs experienced an increase in the flow-performance sensitivity and started taking more risk. In addition, the total funding provided by MMFs to the corporate sector, and especially to safer issuers, has decreased.