Volcker says money-market mutual funds pose risk to the U.S. financial system

According to Bloomberg, quoting former Federal Reserve Chairman Paul Volcker as saying in an interview, money-market mutual funds undermine the strength of the U.S. financial system and should be regulated more like banks.

"Banks remain the functioning heart of the financial system, and they are protected and regulated," Volcker, an economic adviser to the Obama administration, told the news agency. "To the extent they have competitors that have different ground rules, kind of free-riders in my view, weakens the financial system."

The money market universe came to a stop after the Reserve Primary Fund fell below the $1-per-share mark on huge losses from Lehman Brothers debt, shocking the many investors who considered money market funds to be super safe. Among the biggest firms in the money-market funds business in the United States are Fidelity Investments, Vanguard Group, BlackRock Inc, Legg Mason Inc and Federated Investors.

"In my vision of the new financial system, you obviously want to protect banks and have strong banks, and I don't think they should be put at a competitive disadvantage vis-a-vis money-market funds," Volcker told the news agency.

Considered a legend in financial markets, Volcker was head of the U.S. central bank during the Carter and Reagan administrations, when he pursued an aggressive monetary policy that purged inflation from the U.S. economy.