Yesterday's Wall Street Journal wrote "Bernanke and Banks Tested by Latest Market Strains". It said, "Three years after the global financial crisis, and a year after a U.S. regulatory overhaul, the world economy remains vulnerable to hazards that nearly broke the banking system last time. Federal Reserve officials worry that investors could rush out of the $2.6 trillion money-market mutual-fund industry, where millions of Americans park their savings and where the world's banks come for short-term loans.... Fed officials worry about tremors traveling through parts of the financial system and triggering earthquakes. One potential fault line is the $2.6 trillion money-market mutual-fund industry, which was barely addressed under Dodd-Frank, the set of new financial rules passed into a law a year ago. The funds hold savings that are lent to banks and corporations around the world through the purchase of short-term debt. A panic could quickly drain resources from borrowers or destabilize the funds themselves, leading to losses among savers. Unlike U.S. bank deposits, money funds aren't guaranteed by the government. When Lehman collapsed in 2008, it triggered losses in a money-market fund called the Reserve Fund, which held Lehman debt, sparking a broader panic in money market funds. The U.S. Treasury backstopped the industry as investors fled, a move now forbidden by the Dodd-Frank law. The industry, Mr. Rosengren said, is a "source of vulnerability" that needs to be addressed. Investors also worry. Money-market holdings have contracted by nearly $1 trillion since Lehman's collapse, including a reduction of $118 billion since May.... One worry is the exposure to markets overseas, particularly Europe. Foreign financial institutions searching the globe for dollars turn to U.S. money funds for short-term cash. Foreign exposure has increased since the collapse of Lehman Brothers, partly because there are fewer U.S. dealers looking for short-term loans."
