Monday, July 23, 2012

US Capital Controls: New York Fed Backs Withdrawal Limits for Money Market Funds

Step by step the US seems in a transition towards capital controls.

From Bloomberg,

The Federal Reserve Bank of New York said money-market fund investors should be prohibited from withdrawing all their assets at once as a way to make the $2.5 trillion industry “safer and more fair.”

Money funds should set aside a portion of every investor’s balance as a “minimum balance at risk” that could only be withdrawn with a 30-day notice, the New York Fed’s staff said today in a report. The provision would reduce systemic risk and protect small investors who don’t pull out of a troubled fund quickly, according to the report.

“The delay would ensure that redeeming investors remain partially invested in the fund long enough to share in any imminent portfolio losses or costs arising from their redemptions,” the bank said today in a statement.

The idea, opposed by the funds industry, is already part of a proposal before the U.S. Securities and Exchange Commission that would force money funds to float their share value or build capital cushions and impose withdrawal restrictions, a person familiar with the plan said last month. The agency hasn’t made the proposal public and hasn’t scheduled a meeting for commissioners to vote on it.

Once again, policymakers are shown to be in desperation having to limit their visions towards attaining immediate goals, without vetting on the risks of potential unintended consequences from the reactions of the industry and of the public over the medium to long term.

The slippery slope towards capital controls eventually may imply deposit withdrawal limits ala Argentina during the 1999-2002 crisis

The biggest risks from all these would be…let me guess—capital flight and a US dollar crisis.

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