Investors' appetite for money-like assets: The money market fund industry after the 2014 regulatory reform

We document the reaction of money market fund (MMF) investors and portfolio managers to a new SEC regulation that came into effect in October 2016. This regulation forces all prime and municipal MMFs to adopt a system of redemption gates and fees and institutional prime and muni MMFs to also operate under a floating net asset value (NAV). First, we show that in anticipation of the new regulatory framework, investors flowed from prime and muni into government MMFs and especially toward the riskier type of government MMF, agency MMFs, consistent with their likely higher risk appetite profile. Second, the flows from prime and muni MMFs into government MMFs mostly occurred within fund families, supporting the hypothesis that the flows were due to the regulatory changes. This contrasts with past outflows from prime and muni MMFs into government MMFs, such as those seen during the 2008 crisis; in those cases, investors often left not only their prime and muni fund but also the fund family. We relate such differences in investors' behavior to their appetite for money-like assets, whose supply was impacted by the new regulation, as opposed to traditional flight-to-safety motives. Third, the outflow from prime and muni MMFs was stronger for institutional investors, consistent with the fact that these investors are more elastic to industry developments and have been subject to a stricter regulation than retail investors. Finally, as a result of the outflows from prime and muni funds, MMF credit to the private sector has been significantly reduced, whereas credit to government-sponsored enterprises (and in particular Federal Home Loan Banks) has increased substantially.