US money market funds warm to eurozone

European banks benefit from a thaw in sentiment

The amount of money being allocated by US money markets funds to eurozone banks hit the highest level for more than a year, in a sign of how much investor sentiment towards Europe has thawed in the wake of central bank action.

New figures from Fitch Ratings show that as of the end of January, the exposure to eurozone banks by the 10 largest US prime money market funds hit 14.5 per cent of assets under management, the highest level since October 2011 and a 90 per cent jump on a dollar basis since the low-point last June.

For the seventh consecutive month the funds increased their allocations to banks in France, making it the largest single-country exposure in the eurozone for the second month in a row.

US money market funds have traditionally been a key source of short-term dollar funding for banks across Europe but in 2011 they were one of the first investor groups to withdraw as the crisis in the eurozone escalated.

Their return to the eurozone banking sector is a good indicator of the renewed confidence in the region in the wake of intervention by the European Central Bank last year.

A promise by Mario Draghi, president of the ECB, to do “whatever it takes” to save the euro and the launch of a government bond-buying programme by the ECB aimed at ailing eurozone countries last September encouraged international investors back to the region and triggered a months-long market rally.

Robert Grossman, head of macro credit research at Fitch, said there were indications that US money market funds were becoming less risk averse. Funds are more willing to hold unsecured debt and, in the case of French banks, more likely to hold longer-duration certificates of deposit than time deposits, which typically mature overnight or within a few days.

Despite the steady upward trend, Mr Grossman said it was unlikely that the amount allocated by US money market funds to eurozone banks would fully regain their May 2011 levels, when nearly a third of their assets under management were invested in the region’s financial institutions.

Banks were shocked by the speed and scale of the withdrawal of US money market funds in 2011. Since then, faced with regulatory pressures and weak growth, a number of lenders have offloaded or shrunk parts of their business and become less reliant on US money market funding.

Recent data from the Bank for International Settlements show that French banks cut their international lending across all currencies by more than 25 per cent between June 2011 and the end of September 2012.

BIS figures also show that Japanese banks over the same period increased their overseas lending. That shift is also reflected in the US money market funds’ allocations – two out of the three largest single bank exposures by the funds were to two Japanese banks, Mitsubishi UFJ Financial Group and Sumitomo Mitsui.

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