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The functional approach classifies financial innovations according to their contribution to the functioning of the financial system, that is, their purpose.
But he also described the interbank lending market, which is crucial to the functioning of the financial system, as "dysfunctional," and acknowledged anxiety among investors.
The crisis has delivered a very different message: that credit analysis remains critical to the functioning of the financial system, whether securitised or not.
That, the minutes said, could lead the federal funds rate to fall below its target on occasion until "more normal conditions were restored in the functioning of the financial system".
European officials said there was a risk that weak enforcement in one of the bloc's 27 member states could undermine the stability and functioning of the financial system in another member, and that the severity of penalties and fines for market abuses varied widely across the bloc.
But, as with similar tests of banks in the United States last year, it may take days or weeks to determine whether the tests will end banks' mistrust of one another's creditworthiness and encourage interbank lending, which is crucial to the normal functioning of the financial system and ultimately the overall economy.
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It is clear that there are functions of the financial system that must be performed, among them the allocation of capital and the setting of prices.
While this part of Dodd-Frank does give the council a lot of leeway in determining a systemically important activity, opponents of reform may argue that money funds simply aren't part of the payment functions of the financial system, which is what title VIII was written for.
Nevertheless, it is good news that at least one part of the financial system is functioning.
Government involvement, including partial and temporary nationalization of a large part of the financial system in the United States and Europe, will be required to restore the functioning of credit markets.
A joint statement of European Union finance ministers, the European Central Bank, and the European Commission moved to reassure the world markets, saying they would provide any support needed in cooperation with the U.S. The statement said, "All necessary measures will be taken to ensure the proper functioning of markets and the stability of the financial system.
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