Despite the loss of dollar funding owing to money market mutual fund (MMMF) reform in the United States, non-US banks’ aggregate US dollar funding rose to all-time highs in Q3 2016. In particular, deposits outside the United States have risen strongly, offsetting reduced funding from MMMFs. In aggregate at least, non-US banks are not suffering a dollar shortage as in 2008-09.
We estimate that the reform of institutional prime MMMFs, which formally took effect in October 2016, subtracted around $415 billion of dollar funding from non-US banks between September 2015 and December 2016. In some cases, including the largest institutional MMMF, fund sponsors converted such funds into “government-only” funds. In addition, fund investors switched from prime funds to existing government and Treasury-only funds. Both fund conversion and fund switching led to a shrinkage of prime funds’ assets by $1.3 trillion over that period.icon Not all of this came at the expense of non-US banks’ funding, given prime funds’ investments in US-chartered banks and government paper, and government funds’ investment in repos with non-US banks. In the five quarters to end-December 2016, non-US banks lost around $555 billion of US dollar funding from prime MMMFs, but gained approximately $140 billion in repo funding from government MMMFs. This switch reduced the maturity of non-US banks’ MMMF funding.
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