Cash & Liquidity ManagementInvestment & FundingInvestment ManagementUS Money Fund Exposure to Eurozone Banks Rises Again

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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