ECONOMIC REPORT OF THE PRESIDENT

market fund boards new tools – liquidity fees and redemption gates – to
address run-risk.13 Figure 6-16 shows the weighted-average maturity of
MMFs have declined by roughly ten days since the new regulations became
effective, increasing liquidity and reducing the sensitivity of net asset value
to changes in interest rates.14
Measures of Systemic Risk
The FSOC’s mandate includes identifying risks and responding to
emerging threats to financial stability, often referred to as systemic risk.
Scholars have proposed several different measures of systemic risk, each of
which measures an aspect of the tendency for the performance of financial
institutions to move together when the market is under stress. ∆CoVaR
measures the difference between the value at risk (VaR) for the financial
system when an institution is in distress and the VaR of the financial system
when the firm is in its median or typical state (Adrian and Brunnermeier
2014).15 The higher the ∆CoVaR, the more systemic risk is endemic within
the financial system. The distress insurance premium (DIP) is calculated as
the insurance premium that protects against the expected losses of a hypothetical
portfolio of the liabilities of all large banks (Huang, Zhou, and Zhu
2011). Additionally, the Systemic Expected Shortfall (SES) estimates how
likely a certain institution is to be undercapitalized when the financial system
as a whole is undercapitalized (Acharya et al., 2016). Figure 6-17 shows
the measures have receded since the financial crisis but remain above levels
prior to the crisis.
SRISK, measured by the New York University Volatility Laboratory,
translates systemic expected shortfall for the banking system into a dollar
figure in a simulated period of financial stress. This shortfall may be interpreted
as the amount of capital required to absorb a large negative shock. As
shown below, the level of SRISK has come down since the financial crisis and
is approaching pre-crisis levels. Similar to the systemic risk measures above,
13 “Fees and redemption gates” refer to the fund board’s ability to impose liquidity fees or
to suspend redemptions temporarily, also known as “gate,” if a fund’s level of weekly liquid
assets falls below a certain threshold. This provides the ability to stop temporarily a run on the
mutual fund.
14 Many institutions withdrew funds from prime MMFs as the effective date for new SEC rules
that mandated a floating share price for institutional MMFs approached in October 2016. In
anticipation of additional withdrawals from these prime MMFs, managers kept an unusually
high portion of the portfolio in cash, reducing the weighted-average maturity. This is evident
in the rapid decrease in average maturity of these funds toward the end of the period in the
figure.
15 VaR is a measure of the likelihood of a big loss. If the 1 month 1% VaR is $10 million, then
there is only a 1 percent chance that there will be a loss greater than or equal to $10 million
over the month.
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