Shadow banking and financial stability: European money market funds in the global financial crisis

When the troubles in the subprime markets began surfacing 2007, developments unfolded rapidly in the European MMF industry. The industry suffered from asset price drops and investor redemptions. But the difficulties of the MMF industry also spread to the banking sector and contributed to general financial instability that prevailed in 2007-2009. In this article, we describe the main events and developments of the European MMF industry during the global financial crisis. Based on these observations, we analyse the transmission channels through which financial instability may spread from the MMF sector to the wider financial system. Insofar, our article contributes to the understanding of how other financial intermediaries and shadow banking may affect financial stability. A number of policy conclusions on shadow banking and financial stability are also provided.