January 2, 2013 9:53 pm

US funds return to eurozone banks

US money market funds increased their exposure to eurozone banks for five months in a row at the end of last year, underscoring how confidence in the region has improved in the wake of actions by the European Central Bank.

New figures from Fitch Ratings show that US money market funds raised their exposure to eurozone banks by 8 per cent as of the end of November compared with the previous month, the fifth consecutive monthly increase.

The amount allocated to German banks jumped 26 per cent on a dollar basis, while funds raised their exposure to French lenders by 6 per cent over the same period.

The steady return of US money market funds to the region mimics a wider improvement in sentiment among investors towards the eurozone in the months since Mario Draghi, ECB president, pledged to do “whatever it takes” to save the euro and the central back launched its bond-buying programme to help ailing eurozone countries.

Yields on benchmark Spanish and Italian debt have fallen sharply since last summer as investors bet that ECB intervention had sharply reduced the risk of a eurozone break-up.

In 2011, as problems in Greece escalated, US money market funds started pulling money out of eurozone banks. There was a slight pick-up in activity by US money market funds at the start of 2012 as hundreds of eurozone banks took advantage of the ECB’s three-year longer-term refinancing operations, before wider problems over the summer led funds to withdraw again.

However, while the figures from Fitch show a steady rise in exposure to eurozone banks in recent months, the overall amount US money markets funds have allocated to the region’s financial institutions is still 60 per cent below the peak.

At the end of May 2011 US money markets funds held 30.6 per cent of their overall holdings in eurozone banks versus 13.7 per cent at the end of November 2012.

Martin Hansen, a senior analyst at Fitch and co-author of the report, said it was unlikely the exposure of US money market funds to eurozone banks would revert to May 2011 levels in the near-term, particularly given efforts by European banking supervisors to limit the use of short-term US dollar funding.

“Basel III liquidity rules will create a clear disincentive for banks to issue short-term wholesale funding, which has been a staple asset class for money market funds,” said Mr Hansen.

In the face of new regulations and sluggish growth, banks have adjusted their business model. Many have reduced reliance on US money market funds, having seen the susceptibility of such funding to broader instability in financial markets.

Of the prime money market funds surveyed by Fitch – which together represent about $670bn of the $1.47tn of assets under management in the US – Japan remains the country in which they have the biggest bank exposure. Part of this may be due to the fact that Japanese banks have acquired project finance units of a number of European banks, international businesses that are largely dollar-funded.

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.


Sign up for email briefings to stay up to date on topics you are interested in