The folks at the ICI are reading the tea leaves this morning after Ben Bernanke's remarks Monday. The Fed Chair addressed the 2012 Federal Reserve Bank of Atlanta Financial Markets Conference at Stone Mountain, Georgia and he touched on money market fund reform during his prepared speech.

The WSJ provides a direct translation of Bernanke's speech, interpreting it as Bernanke "putting his weight behind other officials who want to toughen oversight of the $2.7 trillion industry."

Bernanke was directly addressing the "shadow banking" system and its contribution to the financial panic in 2008. At one point, he referred to the SEC's proposed reforms that include both the requirement that money funds hold reserve capital and the possibility of floating NAVs.

The WSJ reports that Bernanke clarified his prepared remarks during a press briefing at the conference:

"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."

Bernanke added that:

"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 prepared remarks were more explanatory in nature rather than providing insights into the Fed's strategy:

A second area of ongoing reform is money market funds. 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 Fed's attention to the role of money funds in the "shadow banking" system comes as the number of money fund sponsors is shrinking due to the low interest rate environment and squeezed margins.

Last week Federated Investors, a consolidator in the space, adopted the money funds of Fifth Third. 

Edited by: Sean Hanna, Editor in Chief


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