of contested issues or the development of comprehensive alternatives, nor would it be prudent for them to do so. we should act now to address some obvious sources of vulnerability in the financial system. i believe that the foregoing discussion of implicit support for various shadow banking instruments helps identify areas where misunderstanding and mispricing of risk are more likely, with the result that destabilizing runs are a real possibility. let me then suggest three more - or - less immediate steps that regulators here and abroad should take, as well as a medium - term reform undertaking. first, we should create greater transparency with respect to the various transactions and markets that comprise the shadow banking system. for example, large segments of the repo market remain opaque today. in fact, at present there is no way that regulators or market participants can precisely determine even the overall volume of bilateral repo transactions – that is, transactions not settled using the triparty mechanism. it is encouraging that the treasury department ’ s new office of financial research is working to improve information about this market, while the securities and exchange commission is considering approaches to enhanced transparency in the closely related securities lending market. second, the risk of runs on money market mutual funds should be further reduced through additional measures to address the structural vulnerabilities that have persisted even after the measures taken by the sec in 2010 to improve the resilience of those funds. the sec is currently considering several possible reforms, including a floating net asset value, capital requirements, and restrictions on redemption. clearly, as suggested by chairman schapiro, action by the sec to address the vulnerabilities that were so evident in 2008, while also preserving the economic role of money market funds, is the preferable route. but in the absence of such action, there are several second - best alternatives, including the recent suggestion by deputy governor tucker of the bank of england that supervisors consider setting new limits on banks ’ reliance on funding provided by money market funds. a third short - term priority is to address the settlement process for triparty repurchase agreements. some progress has been made since 2008, but clearly more remains to be done. an industry - led task force established in 2009 orchestrated the implementation of some important improvements to the settlement process. the unwind, with its reliance on vast amounts of discretionary and uncommitted intraday credit from the two clearing banks, was pushed to later in the day, reducing the period during which the intraday credit was extended

, but with a slightly higher return. this risk illusion led to pervasive underpricing of the risks embedded in these money - like instruments and made them an artificially cheap source of funding. the consequent oversupply of these instruments contributed importantly to systemic risk. reliance on private mechanisms to create seemingly riskless assets generally worked in the relatively calm years leading up to the financial crisis and, to some extent, well into the crisis. but, in many cases, discretionary support came into question at the time of acute financial - market stress, precisely when it was needed most, as questions arose about the ability or willingness of large financial institutions to follow through on their implicit commitments. investors were reminded of their potential exposure, leading to wholesale and sometimes disorderly flight. the unwinding of this risk illusion helped transform a dramatic correction in real estate valuations – which itself would have had serious consequences for the economy – into a crisis that threatened the entire financial system. shaping a regulatory response ideally, a regulatory response to the shadow banking system would be grounded in a full understanding of the dynamics that drove its rapid growth, the social utility of its intermediation activities, and the risks they create. such a response would be comprehensive, meaning that it would cover in an effective and efficient manner any activities that create these vulnerabilities, without regard to how the activities were denominated, what transaction forms were used, or where they were conducted. of course, many of the key issues are still being debated, and even those who agree on the desirability of a comprehensive response may differ on its basic form. we should continue to seek the analytic and policy consensus that must precede the creation of a regulatory program that meets these conditions. more work is needed on fundamental issues such as the implications of private money creation and of intermediaries behaving like banks but without bank - like regulation. these implications are potentially quite profound for central banking and banking regulation, considering that the shadow banking much of the attention devoted to securities lending in the wake of the crisis focused on the program run by aig. in addition to general issues involving the reinvestment of cash collateral, aig ’ s securities lending program had more specific and fundamental flaws that go beyond the concerns discussed here. bis central bankers ’ speeches system has caused the volume of money - like instruments created outside the purview of central bank and regulatory control to grow markedly. but regulators need not wait for the full resolution