Pricing Liquidity without Preemptive Runs
Prime money market funds (MMFs) are vulnerable to runs. This was dramatically illustrated in September 2008 and March 2020, when massive outflows from prime MMFs worsened stress in the short-term funding markets and eased only after taxpayer-supported interventions by the Treasury and the Federal Reserve. In this post, we describe how mechanisms like swing pricing that charge a price for liquidity can reduce the vulnerability of prime MMFs without triggering preemptive runs.
Gates, Fees, and Preemptive Runs
In the academic literature on banks, “suspension of convertibility”—that is, preventing the exchange of deposits at par for cash—has traditionally been seen as a potential means of preventing economically damaging bank runs.