Vulnerabilities from funding risks remain “notable” for the nation’s banks and other institutions, according to a report issued Friday (Nov. 22), with such vehicles as money-market funds (MMFs) and other cash-management vehicles “remaining susceptible to runs owing to structural vulnerabilities.”
“Funding risks for most banks remained low, but some banks’ reliance on less-stable forms of funding remained a concern,” according to the November 2024 Financial Stability Report (FSR) published by the Federal Reserve. The report is published twice year, about every six months.
The FSR said MMF reforms taken by the Securities and Exchange Commission (SEC) in July 2023 (increasing minimum liquidity requirements, among other things), and which took effect just last month, made prime and tax-exempt MMFs more resilient.
However, the report states that continued “government MMFs and other short-term investment funds that were not covered by the SEC reforms have continued to grow.”
The FSR notes that “estimated runnable money-like financial liabilities increased about 7.5% over the past year, surpassing $22 trillion.”
The report contends that the growth was mostly driven by an increase in assets under management (AUM) at domestic MMFs and in repurchase agreements. It states that, as a percentage of GDP, runnable liabilities have been relatively stable at 76%, “a level around the historical median.”
“Some open-end bond mutual funds remained vulnerable to significant withdrawals, as they are required to permit daily redemptions despite holding assets that can suffer losses and become illiquid under stress,” the report states. “Meanwhile, life insurers continued to be exposed to funding risks due to their reliance on funding from nontraditional liabilities.
Other key points about funding risk vulnerabilities include:
- Reliance on funding from uninsured deposits decreased for most banks, but reliance on other types of funding—less stable than core insured deposits—increased.
- Money market funds and other cash-management vehicles remained susceptible to runs owing to structural vulnerabilities.
- Stablecoins grew substantially and remained vulnerable to runs. “The total market capitalization of stablecoins was more than $170 billion by the beginning of November, just a notch below the record high observed in April 2022 before Terra’s collapse,” the report states, referring to TerraUSD, a stablecoin whose company filed for bankruptcy early in 2024. “These digital assets are structurally vulnerable to runs and lack a comprehensive federal prudential regulatory framework. Stablecoins still have a relatively small footprint in the U.S. economy, but have experienced strong growth in recent years and have the potential to scale rapidly.”
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