The chairman of the House subcommittee that oversees the mutual fund industry said Thursday he was taken aback when he learned of the high levels of short-term debt of European banks held by U.S. money market fundsmore $900 billion--and plans to drill down into the issue at an oversight hearing Friday to probe whether investors are safe from the debt problems shaking Greece and some of its neighbors.

But Rep. Scott Garrett (R-NJ) indicated he plans to allow the funds principal regulator, the Securities and Exchange Commission, to proceed with additional investor protections before he considers any new legislation to supervise money funds.

If theres need for action, Congress certainly can take it, Garrett said. If not, we can see what the regulators are doing next. Congress can also weigh in with the regulators, as we often do&we can weigh in, make suggestions or encouragement there as well.

So-called prime money market funds, which typically invest in safer short-term debt securities, hold nearly $936 billion in such instruments issued by European banks, according to data supplied by the industry to the SECabout half of prime funds $1.8 trillion in assets.

I was somewhat taken aback--it was a higher number than I would have anticipated, Garrett said in an interview with FOX Business. I would have anticipated it being someplace else around the globe, and I would have thought (that the funds invested) a little more heavily here in the U.S.

The funds holdings have drawn scrutiny from U.S. regulators and lawmakers because European banks own hundreds of billions of dollars of government notes and bonds issued by Greece, Portugal, Italy and Spain, which are in danger of defaulting due to their high debt levels. The European Union and International Monetary Fund have already launched bailouts of Greece and Portugal.

Fund managers  and U.S. regulators  fear Europes financial problems could spook American investors, triggering runs on money funds as customers rush to redeem shares, risking destabilizing the wider financial system.

A major concern is that cash crunches caused by rapid redemptions could cause a firms shares to break the buck. Money funds historically have been valued at $1 a share at all times, reflecting their positions as safe, stable havens for cash in turbulent investment environments.

But at the height of the financial crisis in 2008, the shares of one major money market fund, the Reserve Fund, fell below $1 because of its short-term debt holdings in Lehman Brothers, a major investment bank that filed for bankruptcy that fall. The event triggered a panic among money fund customers.

If you believe everything is OK with regard to the (European) banks, if you believe that the EU (European Union) will somehow&solve the situation over there and banks will be protected, then there's no problem over here for the industry, Garrett said, If you don't believe that everything is going to go just as they plan in the EU with regard to the banks, then of course that raises some concerns.

One credit rating company, Moodys Investor Service, rattled financial markets last week when it put the long-term debt issued by three big French banks under review for a possible ratings downgrade because of their large Greek debt holdings.

Since then, mutual funds and regulators have scrambled to maintain investor confidence in money funds. Among other things, they note that while Moodys announced it put the French bank bonds under review, it reaffirmed its high ratings of the banks short-term debt securities.

Any exposure that U.S. money market funds have to these French banks is deemed of the highest short-term credit quality, the mutual fund industrys trade association, the Investment Company Institute, said this week. Under U.S®ulations, money market funds are required to hold the vast majority of their assets in short-term securities that have received the highest short-term rating&The safety of money market funds derives from their holdings of low-risk, liquid assets.

The money fund investments are comprised mainly of European banks short-term borrowings known as commercial paper, certificates of deposit and overnight repo loans collateralized by U.S. Treasury and agency securities.

While on Wednesday, two top U.S. bank regulators  Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Chairman Sheila Bair  stepped outside their roles as bank supervisors when they made statements reassuring U.S. money fund investors that their risk was limited in the European debt crisis, the head of the European Central Bank, Jean Claude Trichet, also said that the Greek crisis was flashing red for European banks.

Garretts subcommittee will hear testimony Friday from executives with mutual fund giants Fidelity and Vanguard, as well as the president of the ICI, a former SEC official and two mutual fund experts.

The SEC, which Garrett did not ask to testify at the hearing, is currently considering additional regulations for money market funds, such as higher capital requirements. Last year, as part of its moves to improve regulation of investment firms in the wake of the financial crisis, the agency approved new disclosure and investment rules for money funds.

Money market funds have been required to make&fund-by-fund data public since November 2010it is available for investors to see and consider, an SEC spokesperson said. Money market fund holdings are limited to high quality, short term instruments based on SEC rules which were strengthened following the financial crisis of 2008. Since the financial crisis, the SEC has been working with U.S. financial regulators to make money market funds more resilient.

Prime money market funds have no direct investment in the debt of troubled European countries and have been getting out of their investments in the banks in those countries, according to fund data submitted to the SEC and other sources. But the funds still hold about $24 billion in short-term debt instruments of Spanish and Italian banks, 1.7% of prime fund assets, the data show.

A spokesperson for the ICI declined to comment on the investment policies and strategies of money funds.

But another credit rating company, Fitch Ratings, said in a recent report that the funds hold a high among of short-term European bank instruments because the banks dollar-denominated assets have grown rapidly over the past decade and U.S. money funds are ready dollar-denominated lenders for them. In addition, Fitch said, the failure of Lehman and several other big U.S. financial firms during the financial crisis has driven money funds to turn to Europe for more investment opportunities.

In addition to investing in prime money funds, U.S. investors have parked another $1 trillion in money market mutual funds that specialize in buying U.S. government securities as well as tax-exempt municipal bond securities.

Money market mutual funds differ from money market deposit accounts offered by commercial banksthe latter are insured against loss of up to $250,000 by the FDIC.

Peter Barnes joined FOX Business Network (FBN) in September 2007. He serves as FBN's senior Washington correspondent.