Various proposals to address that weakness are on the table: moving to variable net asset value; requiring a cushion of capital or imposing tighter requirements on the liquidity of the assets held by the MMF; establishing “gates” – i.e., restrictions on investors’ ability to withdraw their money at short notice; or a combination of these measures.
The goal is to make MMFs less vulnerable to runs without ending their usefulness as a close substitute for bank deposits and an important source of short-term funding for a number of private and public sector borrowers. What does this mean for Canada? So far, I’ve been talking about shadow banking issues mainly from an international perspective.