window. the shadow banking system grew rapidly in the years leading up to the crisis. by the middle of 2007, the volume of outstanding credit that was securitized had reached more that $ 4 trillion. if the debt securitized by the government - sponsored enterprises ( gses ) is included, the amount of securitized credit had reached $ 9. 5 trillion in 2007. clearly, the shadow banking system was not in the shadows, but was a market - based credit intermediation system that was at least on par with the banking system in terms of its importance to the economy. moreover, this system was not completely separate from the traditional banking system. in fact, much of the risk that the shadow banking system had assumed was ultimately borne by banking organizations. banks had provided backstop lines of credit and had other contractual or reputational reasons to absorb structured credit and other assets back onto their books once they could not be financed in the shadow banking system. in effect, regulated banks functioned to some degree as the lenders of last resort for the shadow banking system. the entire financial system, both in the banks and outside, got caught. it was holding too much risk on too narrow of terms, it did not have sufficient capital, and it was too leveraged and dependent on short - term funding. as it became clear that the value of the u. s. housing stock had to decline considerably, these financial conditions complicated the adjustment. indeed, what started as a seemingly narrow concern about subprime residential mortgage - backed securities cascaded into a widespread and abrupt re - pricing of credit more broadly and a desperate scramble for liquidity. as market participants and investors came to realize that the system was overexposed, they began to withdraw funding. credit lines were reduced, lending terms shortened and demand shifted towards high - quality collateral. major funding markets came under tremendous strain and experienced run - like threats, including the triparty repo market, interbank lending markets, money market mutual funds and the commercial paper market. facing significant redemptions, money market mutual funds withdrew from wholesale funding markets, including from both secured and unsecured commercial paper programs, which further exacerbated those dynamics. the withdrawal of funding raised the possibility of fire sales of assets, which, in a vicious circle, further heightened concerns about financial exposures and accelerated investors ’ flight to safe and liquid assets. asset - backed securities markets virtually shut down as distressed asset sales by sivs and other entities prompted sharp

commend ulrich for seeking to identify universal principles, i believe he would agree that some features of monetary policy implementation frameworks can be dependent on country - specific factors, such as legal restrictions or the organization of the financial system. money market activity in his paper, ulrich notes that money markets, and the overnight markets specifically, are very important for the transmission of monetary policy. this is a common perspective among central bankers involved in market operations, which i share as well, although i question whether overnight trading between banks is as special as ulrich suggests. money markets are where the policy stance of central banks is most directly expressed in market pricing, bis central bankers ’ speeches either by classic temporary open market operations to vary the quantity of reserves in money markets ( as in the fed ’ s pre - 2008 operating regime ) or through the price incentives set by the administered rates available at lending and deposit facilities ( as in the ecb ’ s current full allotment regime ). we have seen a myriad of important changes in money market behavior in recent years, with volume decreasing substantially in some instruments and significant changes in the flows between counterparties. how should we evaluate the current state of our money markets? are they better, worse, or different but just as good as they were pre - crisis? unfortunately, i don ’ t believe we currently have an agreed upon framework to evaluate these changes. let me take a concrete example : prior to the crisis, activity in the overnight interbank federal funds market was driven by the scarcity of reserves balances relative to required and precautionary demand for those reserves by banks. 1 this scarcity produced a considerable volume of trading between banks ; toward the end of the trading day, banks with more reserves than necessary would have an incentive to trade with banks that had too few reserves. 2 after three rounds of large scale asset purchases, aimed at stimulating the real economy, the level of reserves in the united states is about $ 2. 4 trillion today, orders of magnitude larger than the level before the crisis, as can be seen in figure 1. 3 with such a large amount of reserves, very few banks ever need to borrow reserves to meet their requirements, and interbank trading has almost completely disappeared from the fed funds market. instead, the market is now predominantly composed of trades between governmentsponsored enterprises – specifically, federal home loan banks – and banks. 4 in that respect, the fed funds market has come to resemble other segments of the u. s.