May 10, 2011 / 7:10 PM / 9 years ago

FDIC warns on moral hazard for money market funds

WASHINGTON, May 10 (Reuters) - Banking regulator Sheila Bair warned her fellow financial supervisors on Tuesday that a federal backstop for money market funds could induce careless corporate behavior because of a belief the government would always come to the rescue.

Outgoing Federal Deposit Insurance Corp Chairman Bair said regulators needed to be “mindful” of so-called moral hazard on creating a backstop for the $2.7 trillion industry.

During the financial crisis, the federal government was forced to backstop the market after the collapse of Lehman Brothers pushed the value of the Reserve Fund money market fund below $1 a share and wreaked havoc on the industry. (Reporting by Richard Leong and Rachelle Younglai; Editing by James Dalgleish)

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