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Bernanke on Money Fund Reform

In a speech given on April 9, 2012, Federal Reserve Chairman Ben Bernanke Bernanke highlighted his belief that further reforms to money market funds are necessary.  He noted that money market funds are part of the “shadow banking” system and expressed concerns about the area:

Although the shadow banking system taken as a whole performs traditional banking functions, including credit intermediation and maturity transformation, unlike banks, it cannot rely on the protections afforded by deposit insurance and access to the Federal Reserve's discount window to help ensure its stability. 

Bernanke acknowledged the significant regulatory restrictions governing money market funds, designed to ensure adequate liquidity and avoid credit losses.  Yet, he observed, "During the financial crisis, however, these types of measures failed to stave off a classic and self-reinforcing panic that took hold in parts of the shadow banking system and ultimately spread across the financial system more broadly."

While noting that the SEC's 2010 amendments to money fund regulations were substantial, Bernanke signaled that he believes further reforms are necessary:

"In an important step toward greater stability, the SEC in 2010 amended its regulations to, among other things, require that money market funds maintain larger buffers of liquid assets, which may help reassure investors and reduce the likelihood of runs. Notwithstanding the new regulations, the risk of runs created by a combination of fixed net asset values, extremely risk-averse investors, and the absence of explicit loss absorption capacity remains a concern, particularly since some of the tools that policymakers employed to stem the runs during the crisis are no longer available. SEC Chairman Mary Schapiro has advocated additional measures to reduce the vulnerability of money market funds to runs, including possibly requiring funds to maintain loss-absorbing capital buffers or to redeem shares at the market value of the underlying assets rather than a fixed price of $1. Alternative approaches to ensuring the stability of these funds have been proposed as well. Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration."

The full text of Bernanke's remarks can be found here:  http://www.federalreserve.gov/newsevents/speech/bernanke20120409a.htm