IRELAND: Persisting Effect of the Pandemic on Money Market Funds and Money Markets

Wednesday October 21 2020

The Central Bank of Ireland (CBI) has published a letter that explores the experience of money markets during the period of the pandemic from March to August from the perspective of Irish-resident MMFs.

With Ireland accounting for 45 percent of MMFs in the euro area, this analysis provides insights on a global funding channel of banks and companies. Irish-resident MMFs provide a good cross-currency picture, being mostly denominated in sterling and US dollars, with the remainder in euro. By issuing short-term debt, banks and companies benefit from cheaper funding than by issuing longer-term debt or borrowing from (other) banks.

Fund Managers Holding Higher Liquidity Ratios

Despite large investor inflows, fund managers showed a marked reluctance to return to the investment patterns of pre-March, particularly in Europe. Even by August, asset holdings maturing within one week were significantly larger than in February, driven by an ongoing desire to hold precautionary high liquidity ratios. This section describes two phases, namely the accumulation of cash-equivalent assets in March and how this pattern largely persisted in the following months.

MMF funding of other sectors

Irish-resident MMFs have no asset holdings linked to domestically-focused Irish banks. Nevertheless, an indirect effect is possible, namely by providing significant funding to other banks, Irish banks may benefit if this reduces the cost of inter-bank lending. By purchasing debt securities, placing deposits, and engaging in reverse repurchase agreements (securities financing), Irish resident MMFs, through one or a combination of these, act as funders of banks, non-financial corporates, and investment funds. This section focuses on how the nature of this funding changed and, indeed, contracted.

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