Additional regulation of money-market mutual funds could increase short-term borrowing costs for state and local governments, leading municipalities to raise taxes or cut spending on infrastructure and other critical projects, according to a paper released Monday by a
In a 15-page report called “Money Market Mutual Fund 'Reform:’ The Dangers of Acting Now,”
“Imposing major structural experiments on such a vital part of our economy is particularly dangerous at this time, given the current state of anemic economic growth and continued failure to resolve the European sovereign debt crisis,” the paper said. “Now is not the time to raise borrowing costs for businesses or governments.”
Angel, who received financial support for the paper from the
“When drafting regulations, the
Angel’s paper follows recent calls by regulators for more oversight of the
The drop was due to losses the fund suffered from the bankruptcy of
Angel’s paper warns that new regulations being considered could shrink or eliminate the money market industry and lead to higher short-term borrowing costs for governments and businesses.
The paper noted that money markets hold 60% of state and local government short-term debt, which municipalities use to finance infrastructure projects and to maintain cash flow between revenue “spikes,” which occur when governments receive property tax payments.
If short-term borrowing costs rise, municipalities could be forced to issue new, longer-term debt at higher interest rates, Angel said during a press call Monday.
“The munis will have to pay more. … That means they are going to have to raise taxes, find some other way of raising revenue, or … forgo very useful projects,” he said. “At a time when our infrastructure is crying for renewal, now is not the time to be raising the costs.”
“Having seen what happened during the financial crisis, the chairman believes there’s a danger in not acting,” he said.
Angel said regulations could “paradoxically” increase risks by leading municipalities and companies to borrow from “highly leveraged too-big-to-fail banks.”
Angel and another speaker on Monday’s call,
Those regulations tightened money market holding requirements and liquidity standards and require that funds conduct periodic stress tests.
Funds must also disclose holdings and their “shadow” NAV — the fund’s actual net “mark to market” NAV — every month.
“After the 2010 reforms, I don’t think there is a problem,” said Angel, who specializes in the structure and regulation of financial markets, has testified before
Hirschmann called for more conversation between the industry and the
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