Securities and Exchange Commission Chairman Mary Schapiro today answered  Paul Scott Stevens’ volley with one of her own in front of the Committee on Banking, Housing, and Urban Affairs of the United States Senate.

In short, Schapiro said money market funds as currently structured pose a significant destabilizing risk to the financial system. “While the Commission’s 2010 reforms made meaningful improvements in the liquidity of money market funds, they remain susceptible to the risk of destabilizing runs,” she said.

Specifically, Schapiro argued that while the 2010 rules made money market funds more resilient in the face of redemptions by requiring them to increase the liquidity of their portfolios, the amendments did not change the incentives of shareholders to redeem if they fear that the fund will experience losses. The amendments also did not enable money market funds to withstand a “credit event” or the loss in value of a security held by a money market fund, precisely what triggered the run on the Reserve Primary Fund.

“Money market funds are vulnerable to runs because shareholders have an incentive to redeem their shares before others do when there is a perception that the fund might suffer a loss,” she said.