On Friday evening, J.P. Morgan Securities' released an "Update on prime money fund holdings for August 2011," which says, "Prime money fund holdings for the month of August revealed a further reduction of exposure to Eurozone banks. Month over month, holdings of Eurozone bank paper across all credit instruments (e.g., CP, ABCP, repo, time deposits, notes, etc.) declined by $50bn to $316bn, a 14% drop since July and a 23% drop since June."
The report comments, "Interestingly, the reduction in Eurozone holdings this past month occurred despite stabilization in prime money fund balances. In August, prime money funds lost only $8bn in assets under management, compared to $62bn in July and $85bn in June, suggesting that this month's decline in Eurozone paper was more driven by credit than liquidity."
JPM continues, "Of all the Eurozone exposures, French banks took the biggest hit with French CP/CD holdings declining by $47bn. However, this was partially offset by small increases to ABCP ($4bn) and overnight time deposits ($6bn), likely reflecting investors' preference for slightly higher yields while still maintaining very short maturities. Indeed, the percentage of French holdings maturing in less than 30d continued to increase, jumping to 60% last month from 48% in July and 28% in June."
The "Short Duration Strategy" report, written by Alex Roever, Teresa Ho, and Chong Sin, also says, "Beyond the French, most other Eurozone and European countries saw declining balances as well with the banks in Netherlands and the UK experiencing a $17bn and $15bn decrease respectively. However, there appears to be some rotation into higher-quality banks within the European region (e.g., Belgium, Germany, and Norway), mostly in the form of time deposits. With respect to direct peripheral exposure, prime money funds no longer hold any paper to Spanish banks. We estimate that they hold less than $250mm to Italian banks as of August monthend and will let those securities mature this month."
It adds, "Bank maturities were shorter despite the moderation in outflows last month. Regardless of home country, bank holdings maturing in 1-30d increased (Exhibit 2). The one exception was Japan which saw their 1-30d bucket decrease 12% month over month. Their 31-180d bucket increased by the same amount."
JPM comments, "Overall, since 1Q11, Eurozone bank holdings have declined by $125bn, roughly in-line with the $121bn of cash that exited prime money funds. French banks were most affected, experiencing the largest dollar decline of $59bn over this time period ($220bn as of 3/11 and $161bn as of 8/11). They lost on average $12bn of credit from money funds per month since the end of March. The next largest declines reside with the German banks at $27bn ($98bn as of 3/11 and $72bn as of 8/11) and UK banks at $18bn ($171bn as of 3/11 and $154bn as of 8/11)."
They write, "With that said, while the decline in dollar funding to Eurozone banks is sizable, we note that the amount of funding provided by US money funds to those banks represent only a small percentage of their total liabilities. We estimate on average, among the top 20 European banks that money funds provide credit to, money funds comprise only slightly more than 2% of their total liabilities."
Finally, the study expains in a Note, "J.P. Morgan estimates of geographic exposure in prime money market funds are based on a sample of large funds including funds managed by Fidelity, BlackRock, JPMorgan, Vanguard, Federated, Dreyfus, Wells Fargo, Goldman Sachs, UBS, Schwab, SSgA, American Funds, BofA, First American, Northern, Prudential, RBC, Western Asset Management. Sample represents 80% of US prime money market fund market in terms of assets under management. Allocation percentages are calculated from the sample and then applied to the period's total prime fund assets under management." (Crane Data's comprehensive Money Fund Portfolio Holdings collection with info as of Aug. 31 will be published on Thursday, Sept. 15, so look for more commentary on holdings in coming days.)
