US dollar funding markets during the Covid-19 crisis - the money market fund turmoil

Key takeaways

• Short-term dollar funding markets experienced severe dislocations in mid-March 2020, with funding diverted from unsecured funding markets as investors withdrew and switched to secured funding markets and government MMFs.
• Outflows from US prime MMFs led to a loss of funding for banks and a significant shortening of funding maturities; this precipitated spikes in indicators of bank funding costs, such as the LIBOR-OIS spread, despite banks not being at the epicentre of the liquidity squeeze.
• The turmoil highlights broader lessons for MMF regulation, the role of non-banks for monetary policy implementation, and the role of the central bank during stress.

The views expressed in this publication are those of the authors and not necessarily those of the BIS.