Money Market Reforms Seen Harming an Alternative to Banks

Big businesses' misgivings about large banks show through when the conversation turns to regulation.

Two trade groups for corporate treasurers have sounded the alarm about proposed reforms of money market funds, warning that proposed regulations could reduce large companies' financing options — and add to their dependence on megabanks.

"We are mindful of the need for a healthy banking system, but we're also mindful of needs for healthy alternatives to the banking system," says Thomas C. Deas, Jr., the treasurer of chemical company FMC Corp. (FMC) and the chairman of the National Association of Corporate Treasurers.

The Securities and Exchange Commission has proposed rules that would revamp the $2.6 trillion U.S. money market fund industry, arguing it remains a risk to the financial system. Last month, Deas testified before a House subcommittee that the reforms — such as floating the funds' net asset value or imposing new capital requirements — would "have a significant negative impact on the ongoing viability of these funds, and also adversely affect the corporate commercial paper market."

"The cumulative effect of the proposed changes will drive money market fund investors to bank deposits, concentrating risk in a sector where over the past 40 years there have been 2,800 failures, costing taxpayers $188 billion," he said in testimony before the House Financial Services' subcommittee on capital markets.

Jeff A. Glenzer, who oversees public policy for the Association for Financial Professionals, raised similar concerns. Though the AFP doesn't "have a position" on whether big banks should be broken up, "for people who are worried about 'too big to fail,' that [money-market fund reform] would exacerbate it," he says.

More than 50% of corporate cash is already held in bank deposits, according to the association.

Deas also points out how little visibility corporate treasurers sometimes have into the health of their bank partners.

"A money market fund's public financial statements, giving what their investments are and duration and credit quality, are very straightforward to read," Deas said in an interview. Banks' financials can be hard to read, he says, invoking the massive trading losses that dragged JPMorgan Chase into public scrutiny this spring and helped re-ignite public discussion about separating banks' commercial and investment functions.

"Obviously even [JPMorgan Chief Executive] Jamie Dimon, with all of his access not only to public financial statements but to internal reports and daily value-at-risk analyses that he receives, was unable to perceive the trouble in their London trading operation," Deas says. "That's why it's important to us to have money market funds as an alternative, both for investments and for their ability in some respects to disintermediate the banks."