Fear causes MMF exposure to Eurozone banks to fall 33%

Continued risk aversion has caused US prime money market fund (MMF) exposure to Eurozone banks to slump 33% during June 2012, according to Fitch Ratings’ study of the exposures of the ten largest US prime MMFs.

Eurozone bank exposure now represents about 8% of total MMF assets, a record low since end-2006, when Fitch began tracking the data.

Aggregate MMF allocations to the rest of Europe declined moderately, Fitch said. Decreasing exposure to UK banks was partially offset by increased allocations to Nordic banks.

Outside Europe, MMF exposures to Japanese banks have doubled since May 2011, and are now at their highest level, at almost 12% of total fund assets, over Fitch’s study period. Holdings of Canadian and Australian banks remained relatively steady.

“Money fund disengagement stems from both ongoing risk aversion and heightened caution by some European banks and their regulators on using this potentially volatile form of funding,” said Robert Grossman, managing director, Fitch Macro Credit Research.

The 15 largest exposures to individual banks collectively represent approximately 43% of total MMF assets. Consistent with Fitch’s findings, only one Eurozone institution remained within the top 15, compared with three Eurozone banks at end of May 2012 and seven at end-May 2011.

Another sign of risk aversion is that holdings of short-term US Treasuries and agencies continue to exceed 20% of MMF assets.

Fitch added that almost 10% of MMF assets are in the form of repos collateralized by Treasurys and Agencies, meaning in effect that roughly one-third of prime MMF assets within Fitch’s sample represent Treasury and Agency exposure, versus 20% as of end-May 2011.

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