Boston Fed President Eric Rosengren emphasised the importance of maintaining short term credit stability by guarding the market for money market mutual funds in a speech he gave in Stockholm last week.Pointing out similarities to the collapse of short-term funding that escalated after the fall of Lehman Brothers in 2008, Rosengren argued that MMMFs are increasingly vulnerable as credit conditions tighten across the world.
The failure of one fund, he added, could result in a collapse in short-term credit in general. Not to mention that branches of foreign banks could get swept up by much the same problems.
His answer? Basel III will help foreign banks maintain more capital, but the U.S. should also consider more closely regulating the MMMF and foreign banking industry.