US MMFs’ Exposure to Eurozone Banks Dips

US prime money market fund (MMF) exposure to eurozone banks decreased slightly during December, with the notable exception of French banks, according to a Fitch Ratings report. The credit ratings agency (CRA) adds that it represents the first time since end-June 2012 that MMF eurozone holdings decreased.

Overall, MMF allocations to eurozone banks have increased by more than 70% since falling to a historical low in end-June 2012 and now represent 12.9% of MMF assets. However, Fitch notes that MMF allocations to eurozone banks remain more than 60% below end-May 2011.

The one exception to the December trends was French banks. Allocations to French banks continued to increase and ended 2012 representing approximately 6.5% of assets under management. This is the first time since end-August 2011 that France represents the largest single country exposure within Europe. Japan remains the largest single-country exposure globally at 13.2% of MMF assets, a 6% increase since end-Nov. 2012.

The proportion of European and eurozone exposure in the form of repurchase agreements (repos) decreased markedly, a reduction in secured exposure that might to some extent indicate an easing in MMF risk aversion to the sector. Aggregate repo exposure represented about 15% of total MMF assets at end-December, down from 20% of MMF assets at end-November.

Fitch believes it is unlikely that MMF exposures to European banks will return to 2011 levels, given ongoing efforts by many financial institutions and banking regulators to limit the use of short-term wholesale funding.

The CRA adds that its analysis is based on a sample set of the top-10 largest US MMFs per each observation period and represents approximately US$668bn, or 45% of the estimated US$1.49 trillion in total US prime MMF assets under management.

In a separate report, Fitch said that over half of Institutional Money Market Funds Association (IMMFA) euro MMFs by assets have adopted or publicly announced they are in the process of adopting structural share class changes in response to potential negative euro money market yields, amounting to nearly €50bn assets. Investors have been accepting of this: changes have been approved at extraordinary general meetings (EGMs) and outflows have not been unusually high compared to seasonal patterns. Fitch added that it expects more fund complexes to follow suit.

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