The Treasury Department has moved to alleviate concerns by bankers about unfair competition from money market funds under a guarantee plan unveiled last week.
On Friday, the U.S. Treasury announced a 1-year program that would insure the holdings of any publicly offered eligible money market mutual fund. The move was made as a potential loss of confidence in money market funds threatened to bring down the U.S. financial system.
The American Bankers Association quickly issued a statement indicating deep concern that the plan might undermine the banking system because money market funds pay higher rates and had no investment limits under the Treasury's plan.
On Sunday, the Treasury released a statement clarifying that the guarantee would only apply to amounts already invested in money market funds as of the close of business on Sept. 19. In addition, only publicly offered funds regulated under Rule 2a-7 of the Investment Company Act of 1940 and registered with the Securities and Exchange Commission will be eligible to participate in the program.
The move seemed to placate the bankers.
"By limiting this new guarantee to funds that existed on or before last Friday, they have eliminated the incentive for people to move money out of bank accounts to seek a higher government guarantee," ABA said yesterday in a statement. "If all money market mutual funds had been included with the government guarantee moving forward, this proposal would have threatened to take money out of local FDIC-insured banks -- which have paid for their insurance -- and put it into firms that have no incentive for community reinvestment."
The Treasury also indicated that taxable and tax-exempt money market funds are eligible for the fund, though participation in the fund would not jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.
Bankers Upset Over Money Market Move
U.S. bankers consider the move by the Treasury to guarantee money market funds to be grossly unfair.