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The Canary in the Mine

Updated: Apr 13, 2019

It could be excessively high price earnings multiples. It could be increased credit spreads. It could be asset price inflation. And it usually is a combination of these and other factors – that might indicate trouble on the horizon.

Contain contagion has become the mantra for Regulators. No one realistically thinks that the next financial crisis can be averted. But the next crisis should not flare up owing to financial linkages across sectors. That theme is seen across regulation.

The Money Market Fund Regulation’s main focus is on bringing in uniform rules which are also designed to prevent a problem in one part of the market; or at one fund; or in one instrument type from flaring into a market-level crisis.

It also requires each Fund Manager to carry out stress tests on the Funds it runs, to get a sense of vulnerabilities.

That prescription puts intense scrutiny on one of the lead indicators of a financial blow-out: the money markets. In the opening paragraphs of the regulation there is reference to the “events that occurred during the financial crisis.”

Everyone thinks ‘Lehmann’ and the fortnight of zero liquidity that followed. Rewind by a full six months and you have the seizing up of the markets in March / April of 2008 around the Bear Stearns episode. Roughly $ 250 billion dollars were pumped in to the money markets on both sides of the Atlantic by Central Bankers all around.

One imagines and hopes that an event of that scale will not escape attention the next time around. Institutional investors form around 51% of the money in Money Market Funds. Another 33% are corporate investors. (IMMFA, an industry body provides such data.) Presumably most, if not all of these investors have the heft needed for informed decision making. They should be able to use the disclosures, reporting and stress tests to make more informed decisions on where they place their money.

And we should have a fair warning of any impending crisis triggered by causes in the money market.

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