Fitch Ratings releases a study this morning entitled, "U.S. Money Fund Exposure to European Banks," which shows that money fund exposure to Europe overall remains high but exposure to "PIIGS" countries, save Italy, is zero. Fitch says, "Market sentiment on European sovereigns that have experienced heightened investor concern continues to affect the perceived credit risk of financial institutions in those countries. An important funding channel for European financial institutions and, therefore, a potential channel for eurozone sovereign risk, is U.S. prime money market funds (MMFs), which continue to have sizable exposures to European financial institutions."
The research piece continues, "This report updates Fitch Ratings' prior research on this topic (see December 2010 study, "U.S. Money Market Funds: Recent Trends in Exposure to European Banks") as of end-February 2011 and focuses on MMF exposures to banks' certificates of deposit (CDs), commercial paper (CP), asset-backed CP (ABCP), and, new for this report, repurchase agreements (repos)." (See Crane Data's latest Money Fund Portfolio Holdings series for statistics on exposure to individual names.)
Fitch explains, "MMF exposure to Spanish banks has declined significantly from peaks of roughly 3.0% of total MMF assets in 2008 and 2009 to just less than 0.2% as of February 2011 (see chart). This exposure was 1.7% as recently as 1H 2011. MMF exposure to Italian banks, which until recently has followed roughly similar patterns as Spanish banks, has not experienced the same sharp decline. For example, Italian banks represented approximately 1.3% of MMF total exposures in both 2H 2010 and as of February 2011."
It adds, "MMFs continue to have immaterial exposure to Portuguese and Irish banks after peaking in 1H 2009 (0.5% of total MMF assets) and 1H 2008 (1.5% of total MMF assets), respectively. MMF exposure across all European banks (including CD, CP, ABCP, and repos) remains significant at 44% of total MMF assets as of February 2011. This is down slightly from 2H 2010 of 45.9% (or approximately 40% if excluding repos). The largest European exposures are to banks in France (12.4% of total MMF assets) and the U.K. (8.6%)."
The Fitch study comments, "The 10 largest bank exposures (CD and CP) have changed significantly over the period of study (see Largest CD and CP Exposures table). For example, only two of the 10 largest exposures as of 2H 2007 (Societe Generale and Rabobank) remained in the top 10 as of February 2011. This change in composition partly reflects a shift in asset type, since several of the largest exposures as of 2H 2007 were to institutions that were active sponsors of ABCP programs, an asset class that has declined markedly over this period."
The report lists "Drivers of U.S. MMF Exposure to European Banks," saying, "There are several macro factors that help to explain the significant exposure of U.S. MMFs to European bank issuers." These include: Need for Dollar Funding: The dollar-denominated assets of European banks have grown rapidly over the past decade. Dollar-based European bank assets rose from approximately $2 trillion in 1999 to more than $8 trillion in 2008 according to the Bank for International Settlements (BIS).... U.S. money funds provide a natural source for short-term dollar financing (e.g., prime money fund total assets are approximately $1.63 trillion as of March 2011)."
Other Drivers include: "Financial Industry Consolidation: Industry consolidation and the failure of several financial institutions during the financial crisis have reduced the global universe of potential MMF investment targets, particularly in the U.S. For example, from the 1H 2007 through the beginning of 2011, the total number of financial institutions within this study's sample of MMFs dropped by approximately 20%.... This consolidation resulted in relatively more European institutions represented in the MMF investment mix. Shrinkage of the ABCP Market: Since the beginning of 2007, ABCP outstanding has dropped from $1.2 trillion to $390 billion currently, in part reflecting diminished MMF appetite for this asset class. European bank CD exposure has helped to fill the resulting void."
