US MMF exposure to the eurozone declines in May, says Fitch

US prime money market fund (MMF) exposures to eurozone banks declined moderately at the end of May 2012, with exposure to the region at 12% of total MMF assets, according to a report released today by Fitch Ratings.

In the report ‘US money fund exposure and European banks: disengagement continues’, Fitch said over the past months MMF exposures to Eurozone have fluctuated within a fairly narrow range, averaging approximately 12% since end-November 2011.

This trend followed a sharp decline in the second half of 2011.

The relative stability is consistent with Fitch’s view that MMF allocations to eurozone banks are unlikely to retrace their mid-2011 levels, a ‘partial disengagement’ stemming both from ongoing MMF risk aversion to this sector as well as heightened caution by some European banks and their regulators on the use of this potentially volatile form of funding, the agency said.

“The slight increase of MMF allocations to Eurozone banks during the first two months of 2012 proved short-lived as positive momentum from policy actions gave way to ongoing investor concern about the region,” said Robert Grossman, managing director and head of Fitch’s macro credit research team.

According to Fitch Solutions indices, CDS spreads for European banks tightened in the first few months of 2012, during which MMF allocations to Eurozone banks began to increase from their year-end 2011 low.

Roughly 10% of MMF assets in the sample analysed by Fitch are in the form of repos collateralized by treasuries and agencies, indicating that more than 30% of MMF assets represent Treasury and Agency exposure when direct holdings are also considered.

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