US Money Fund Exposure to Eurozone Banks Rises Again

US prime money market fund (MMF) exposure to eurozone banks has risen for the fifth consecutive month although exposures remain well-below previous levels, according to Fitch Ratings.

The credit ratings agency’s (CRA) report, entitled
‘US Money Fund Exposure and European Banks: Eurozone Rises for Fifth-Straight Month’
, states that as of end-November 2012 eurozone bank allocations accounted for 13.7% of total U.S. MMF holdings, an 8% increase on a dollar basis since end-October 2012. During the same period MMF allocations to German and French banks increased by 26% and 6%, respectively. Despite these recent increases, MMF exposure to eurozone banks remains 60% below end-May 2011 levels.

Fitch believes a return to end-May 2011 eurozone exposures in the near term is unlikely, particularly given European banking supervisors’ efforts to limit banks’ use of short-term US dollar (USD) funding. New Basel liquidity rules will likely also discourage banks’ use of short-term wholesale funding. These regulatory pressures could constrain the future issuance of shorter-term bank debt, which has historically been an important asset class for MMFs.

The proportion of European and eurozone exposure in the form of repurchase agreements (repos) rose slightly, indicating a preference for secured exposure that might signify lingering MMF risk aversion to the sector. Aggregate repo exposure continues to represent about 20% of total MMF assets.

The 15 largest exposures to individual banks, as a group, comprise approximately 42% of total MMF assets, with only one eurozone bank within the top15.


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