The Perils of Removing Rating-Based Regulation: Evidence From the US Money Market Funds Reform

Focusing on the 2016 US money market funds (MMFs) reform, this study assesses the impact of removing rating-based rules on the behavior of regulated investors and on market prices. Difference-in-differences fund-level and security-level analyses show a positive impact of the reform on the level of risk-taking by non-government MMFs. No empirical support is found for alternative explanations for the verified change in portfolio allocation. This shift has material consequences for the pricing of credit risk: all else equal, the reform-driven increase in the demand for riskier securities by MMFs is associated with a significant decrease in credit premia for commercial papers.