The Bank for International Settlements, in its latest BIS Quarterly Review," features a brief entitled, "Non-US banks' global dollar funding grows despite US money market reform." The piece says, "Despite the loss of dollar funding owing to money market mutual fund (MMMF) reform in the United States, non-US banks' aggregate US dollar funding rose to all-time highs in Q3 2016. In particular, deposits outside the United States have risen strongly, offsetting reduced funding from MMMFs. In aggregate at least, non-US banks are not suffering a dollar shortage as in 2008-09. We estimate that the reform of institutional prime MMMFs, which formally took effect in October 2016, subtracted around $415 billion of dollar funding from non-US banks between September 2015 and December 2016. In some cases, including the largest institutional MMMF, fund sponsors converted such funds into "government-only" funds. In addition, fund investors switched from prime funds to existing government and Treasury-only funds. Both fund conversion and fund switching led to a shrinkage of prime funds' assets by $1.3 trillion over that period. Not all of this came at the expense of non-US banks' funding, given prime funds' investments in US-chartered banks and government paper, and government funds' investment in repos with non-US banks. In the five quarters to end-December 2016, non-US banks lost around $555 billion of US dollar funding from prime MMMFs, but gained approximately $140 billion in repo funding from government MMMFs.... This switch reduced the maturity of non-US banks' MMMF funding." The piece adds, "Overall, we find that non-US banks offset their loss of funding due to US MMMF reform by raising dollar deposits at offices outside the United States and by drawing down excess reserves at the Fed. With less cash, rising loans and the shift to short-term repo funding from MMMFs, foreign branches and agencies in the United States have extended the maturity of their portfolios and taken on more credit risk. However, they collectively still held $630 billion in reserves at the Fed at end-September 2016, a third of the total."
