Time to Move on from Prime Money Market Fund Alarmism

During the global financial crisis (GFC) and the COVID crisis, as financial markets experienced severe stress, investors withdrew large sums from institutional prime money market funds (MMFs) (Figure 1). Following these events, regulators introduced reforms aimed at strengthening those funds' ability to withstand future shocks. Regrettably, these changes significantly reduced the demand for institutional prime MMFs—all but killing them off (e.g., note the roughly $700 billion drop in institutional prime funds’ total net assets in 2016). 

Institutional Prime Money Market Funds Shrank Substantially After the 2014 MMF Reforms
Total net assets in billions of dollars, week ended Wednesday, January 3, 2007–December 29, 2021

* The drop in retail prime funds’ total net assets in September 2020 reflects a fund sponsor’s decision to convert a retail prime fund to a retail government fund.

Source: Investment Company Institute

Some financial stability regulators have now shifted focus to retail prime funds. They claim retail investors have become more sensitive to shocks since 2008 (see Federal Reserve Bank of Boston staff note). Based on this claim, they conclude that retail prime funds could become the next institutional prime funds, potentially justifying stricter regulations for retail prime MMFs.

But are the results in the Boston Fed staff note compelling?  In short, no. We believe there is little evidence to support this conclusion.

The Boston Fed staff note compares flows from institutional and retail prime funds during the GFC and COVID crises, seeking to make the case that cumulative outflows from retail prime funds were much larger during the COVID crisis than the GFC.[1]

But let’s see what the evidence says. Outflows from retail prime funds increased a mere 3 percentage points (from 7% of assets in the GFC crisis to 10% of assets in the COVID crisis). In addition, the pace of retail prime outflows pales in comparison to that of institutional prime funds (exceeding 25%) in both crises. Clearly, retail investors reacted much less strongly than institutional investors.   

Outflows from Retail Prime MMFs Pale in Comparison to Those from Institutional Prime MMFs During 2008 and 2020 Crises
Cumulative outflows as a percentage of fund assets since shock*, daily

*The shock for the 2008 global financial crisis began on September 15, 2008, and the shock for the 2020 COVID crisis began on March 13, 2020.

Source: iMoneyNet

Further, the uptick in retail prime funds’ cumulative outflows between those two crises was unlikely due to retail investors becoming more sensitive to market stress. Several factors were at play. 

First, the two crises differed. The GFC was rooted in the implosion of the subprime mortgage market, while the COVID crisis was induced by government-imposed lockdowns. These lockdowns likely led people to build cash (e.g., by redeeming from prime MMFs) to keep their families and businesses afloat. 

Second, post-GFC reforms gave prime funds—both institutional and retail—the option to impose liquidity fees and redemption gates if their weekly liquid assets (WLA) fell below 30% of assets. To avoid this possibility, during the COVID crisis, institutional investors reportedly redeemed pre-emptively from prime institutional MMFs. It is likely retail investors acted the same way, albeit much more mildly. In 2020, almost half of mutual fund-owning households held funds through financial professionals, who were likely monitoring concerns around fees and redemption gates.[2] This increased scrutiny may have contributed to outflows from retail prime money market funds.

To strengthen MMFs’ resilience under market stress, after the COVID crisis, the Securities and Exchange Commission (SEC) introduced another round of MMF reforms. Notably, in 2023, the SEC removed the link between WLA and the possibility of imposing fees and gates, eliminating one factor that boosted investor redemptions during the COVID crisis. The SEC also raised the minimum amount of WLA prime funds must hold from 30% to 50% of fund assets (Figure 3). Prime funds are thus significantly more liquid now than in 2008 and 2020.

Prime Money Market Funds Are More Liquid Now Than in 2008 and 2020
Average weekly liquid assets of prime money market funds, percentage of fund assets, weekly, January 2, 2007–July 22, 2025

Note: Averages for 2010–2019 exclude observations from June 2016 to May 2017. 

Source: ICI calculations of iMoneyNet data.

Conclusion 

Demand for retail prime MMFs has grown substantially since the Federal Reserve started hiking interest rates in early 2022, with assets totaling about $1 trillion in July 2025. But the structure of retail prime MMFs has evolved dramatically. They are now more liquid and no longer have a regulatory tie between the level of their WLA and the possibility of liquidity fees and redemption gates. Moreover, they have a far less reactive investor base than institutional prime funds. The idea that retail prime MMFs are the next systemic risk is not only unsupported by the data—it’s a distraction.

Financial stability regulators need to move off this well-worn ground and instead focus on reforms that will improve money market functioning during crises, like revising the Supplementary Leverage Ratio rule and revisiting other bank capital rules.     

Notes