However, the use of such funds is more widespread in the United States and the total volume amounted to over USD 3 trillion in 2008 – quite a lot of money, in other words. One trillion is equal to one thousand billion or one million millions. In the United States, as in Sweden, money market funds avoid almost all investments that may involve credit risk. Taking credit risks is quite simply not their business concept. Like all funds, they administer their clients’ money for a fee, and clients who are investing their liquid funds over the short term do not wish to be exposed to any credit risk. Put simply, it could be said that these funds are intended to function like a normal savings account in a bank, albeit with slightly better interest. So, by providing this “bank account” style of saving, the funds essentially function like normal banks, even though they are not banks. When we say that, before the crisis, there existed an extensive shadow banking system that was not as strictly regulated as the “real” banks were, it is partly these funds to which we are referring. Accordingly, money market funds do not like credit risk. So when the funds (and their customers) started to suspect that some European banks had large holes in their balance sheets, they pulled out of the market. This was not a matter of pricing, it was a matter of credibility.
In difficult times, banks will be allowed to fall significantly below the target levels defined for good times. Allowing banks to draw down capital without violating any minimum requirements helps to mitigate the harmful effects of deleveraging. Overall, regulators must no longer allow banks, especially systemically important ones, to operate at such worryingly low capital levels as have been observed in the buildup of the current crisis. At the beginning of this month, the finance ministers and central bank governors of the G20 were very explicit on this. More robust liquidity requirements The crisis has also provided a number of important lessons regarding liquidity. In short, banks’ liquidity holdings were insufficient. This holds true for the quantity but also for the quality of liquidity. One of the explanations for these insufficient holdings of liquidity was that the stress scenarios considered by banks were far too optimistic. While secured funding remained the most stable source of refinancing, it was much less stable than what banks and  BIS Review 115/2009  3  regulators had assumed. Moreover, it quickly became apparent that liquidity problems at single banks imposed considerable stress on the entire international system. As in the area of capital, the FSB and the Basel Committee are working at full throttle towards an internationally coordinated liquidity standard for banks.