Staff Reports
Money Market Funds Intermediation and Bank Instability
Previous title: "Money Market Funds Intermediation, Bank Instability, and Contagion"
February 2013 Number 599
Revised May 2013
JEL classification: G21, G23, G01

Authors: Marco Cipriani, Antoine Martin, and Bruno M. Parigi

In recent years, U.S. banks have increasingly relied on deposits from financial intermediaries, especially money market funds (MMFs), which collect funds from large institutional investors and lend them to banks. Intermediation through MMFs allows investors to limit their exposure to a given bank. However, since MMFs are themselves subject to runs from their own investors, a banking system intermediated through MMFs is more unstable than one in which investors interact directly with banks. The mechanism through which instability arises in an MMF-intermediated financial system is the release of private information on bank assets, which is aggregated by MMFs and can lead them to withdraw en masse from a bank. 
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