A top executive at the world's largest bond fund said on Thursday that money market mutual funds should not exist in their current form.

Pacific Investment Management Co's (PIMCO) Paul McCulley told a Levy Economics Institute conference that money market funds contributed directly to the instability of the financial system by acting as foundation for the shadow banking system.

McCulley's remarks followed a similar call by former Federal Reserve Chairman Paul Volcker at the same conference.

Volcker proposed money market funds be regulated in a fashion similar to banks. He called for tighter restrictions on the types of assets in which they could invest.

My viewpoint is very similar to Chairman Volcker's viewpoint, that this should not be a sidebar issue in regulatory reform, McCulley said.

It is a bank and it has absolutely no capital, McCulley said of the structure of money market funds. McCulley runs PIMCO's approximately $500 million money market fund.

McCulley said the run on money market funds after the collapse of Lehman Brothers in the fall of 2008 showed the need to bring them under the supervision of regulators who could backstop them if they falter.

(Reporting by Emily Flitter and Kristina Cooke; Editing by Bernard Orr)