With the SEC money market fund rules taking effect this Friday and the Libor up sharply, fund managers are reportedly beginning to see lending to European banks as too much of a risk. The bigger worry is this pullback has the potential to lead to another credit crunch like the one that nearly crippled the capital markets in 2008.

Already, the rates that European banks are paying for three-month commercial paper have risen to the 0.60%-0.70% range, up from 0.15%-0.20%, said Amitabh Arora, head of U.S. rates strategy at Citigroup. Anything longer than a month is commanding a premium, Arora told The Wall Street Journal.

“Obviously, with conditions in the euro zone as they are, we’ve taken a second and third look at our exposures over there and adjusted our portfolio where appropriate,” notes David Glocke, manager of Vanguard’s $150 billion in taxable money market funds.

The SEC is now requiring money funds to hold more liquid, higher quality paper and shorten the average maturity of the funds’ portfolios from 90 to 60 days.

Meanwhile, some U.S. banks are questioning whether they should depend on Libor — the influential composite of short-term borrowing costs for some of the world's largest banks — as a peg for domestic loans. Some industry experts wonder how accurate the index actually is, in light of the growing European debt crisis.

See related stories in American Banker: “Questioning Libor as a Peg for Loans in the U.S.” and “In Bank Loan Market, Investors See Troubling Neglect of Volatility.”