banking

5 steps to improve the financial system

Find a fix for money market funds
Find a fix for money market funds © Aaron Amat/Shutterstock.com

In September 2008, at the depths of the financial crisis, money market funds emerged as a point of weakness in the financial system, a surprising turn of events for those who viewed them as risk-free investments akin to cash. Panicked financial institutions simultaneously fleeing money market funds put a freeze on credit markets and threatened to destabilize the entire system until the federal government decided to guarantee all money market funds.

Since then, policymakers have struggled to agree on a long-term solution to the problem. The Securities and Exchange Commission in 2010 adopted reforms aimed at greater transparency and stricter requirements for money market fund investments. But in November 2012, the oversight council proposed its own set of reforms to structurally reshape money market funds. In early June, the SEC proposed another set of rules aimed at making the sector safer, in part by letting funds deviate from the fixed value of $1 per share.

One controversial idea is letting money market funds charge a fee to investors who withdraw money when there's market turmoil. The presidents of the 12 Federal Reserve regional banks opposed that provision in a February letter.

The only thing everyone seems to agree on is the need for sound policies to prevent a repeat of the 2008 crisis.

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