The Impact of the Shadow Banking Sector on Public Finance
Chuck Boyer, Finance PhD student
Kelly Posenau, Finance PhD student
In response to the financial crisis, the SEC implemented a series of reforms in 2016 designed to make money market mutual funds (MMFs) stable. We study the effects of the reforms on the $200 billion U.S. municipal variable rate demand note (VRDN) market, which are primarily held by MMFs. We show tax-exempt fund holdings of municipal variable rate demand notes (VRDN) dropped precipitously around implementation of the reform. Our initial results suggest the reform may have increased short-term borrowing costs for municipal governments. We also plan to explore how pre-existing relationships between issuers, re-marketing agents, and funds led to cross-sectional differences in fund behavior and borrowing costs around the reform. In order to properly observe borrowing rates for municipal borrowers and their relationships with various agents, we will need more a more complete dataset on this asset market.