Money Market Funds and Financial Stability

The financial crisis, in particular the collapse of Lehman Brothers, has revealed that money market funds are more risky than had previously been believed. We discuss the importance of money market funds for financial stability and whether situations similar to those in the US and Icelandic markets could arise in Sweden. We find that there are similarities between the Swedish and Icelandic funds, but few similarities with the US funds. In Sweden, as was the case in Iceland, the assets under management are concentrated in a few funds and the connection to the major banks is strong. However, given the relatively small size of the money market funds in Sweden, we do not find that they, in isolation, are of major systemic importance as a source of funding for the Swedish banks. The funds are more likely to have a systemic impact through spill-over effects on the banking system, especially in a market already characterised by high uncertainty and risk aversion. The money market funds are thus more important to certain parts of the financial market, such as the market for corporate commercial paper and covered bonds