Money-market mutual funds undermine the strength of the U.S. financial system and should be regulated more like banks, Bloomberg reported former Federal Reserve Chairman Paul Volcker as saying in an interview.

Banks remain the functioning heart of the financial system, and they are protected and regulated, Volcker, an economic adviser to the Obama administration, told the news agency.

To the extent they have competitors that have different ground rules, kind of free-riders in my view, weakens the financial system, the news agency quoted Volcker as saying.

The money market universe came to a stop after the Reserve Primary Fund fell below the $1-per-share mark on mammoth losses from Lehman Brothers debt, shocking the many investors who considered money market funds to be super safe.

Fidelity Investments, Vanguard Group, BlackRock Inc , Legg Mason Inc and Federated Investors are among the biggest firms in the money-market funds business in the United States.

In my vision of the new financial system, you obviously want to protect banks and have strong banks, and I don't think they should be put at a competitive disadvantage vis-a-vis money-market funds, Volcker told the news agency.

Considered a legend in financial markets, Volcker was head of the U.S. central bank during the Carter and Reagan administrations, when he pursued an aggressive monetary policy that purged inflation from the U.S. economy.

Volcker is one of few policy-makers in Washington today who has lived through the Great Depression.

(Reporting by S. John Tilak in Bangalore; Editing by Erica Billingham)

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