From Mr Robert Mercer-Nairne.

Sir, In his article “Don’t leave the financial system resting on quicksand” (August 30), John Gapper expressed sorrow at the failed attempt by Mary Schapiro, chairman of the Securities and Exchange Commission, to reform the money market industry. As he points out, money market funds have become a key source of short-term funding for the banks. Supposedly invested in high-grade short-term securities, these funds are assumed to be worth what is invested in them. But in a financial panic, money fund investors are likely to pull out their funds faster than the underlying assets can be realised, especially if some of those assets (such as European sovereign debt) become impaired. Hence the quicksand.

While this analysis is correct at one level, at another it misses a fundamental point, one often overlooked when regulators and politicians react to the fallout from a crisis. Financial systems – like life itself – always rest on quicksand. Ultimately all the relationships that we have built to sustain us depend on confidence. The key to survival is not tightly interlocking systems, like some regulatory Maginot Line, but loosely connected ones in which the survival of one part does not depend on the survival of the part below it.

Money funds evolved because people needed them. Their liquidity is now a vital part of our economic system. They should benefit from government-backed insurance and the premium taken from the interest they pay investors. This raises the question: what government? Not all are created equal. With globalisation, ever bigger guarantors are required. If justification for an integrated Europe were needed, this is it.

Robert Mercer-Nairne, Sliema, Malta

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.