WSJ: Prime MMF Exits Bad for Banks
The Wall Street Journal writes that "Money-Market Shifts Are Bad News for Profit-Starved Global Banks." The piece states, "Last week, Fidelity Investments said it would close two institutional prime money-market funds with a total of around $14 billion in net assets. That's an ominous portent for some non-U.S. banks, which have increasingly come to rely on such funds to raise dollars they can't easily acquire at home. Fidelity cited volatile outflows from the funds -- which invest in short-term commercial paper and certificates of deposit issued by companies -- and into government money-market funds during moments of market stress. Fidelity's retail prime money-market funds, whose assets run into the hundreds of billions, will remain open." (See our June 22 News, "Fidelity to Liquidate Prime Instit Money Funds; Cites Investor Behavior.") The Journal explains, "But non-U.S. banks will feel the loss: 20% of the Prime Reserves Portfolio, the larger of the two funds being closed, is invested in certificates of deposit, all issued by Canadian, Japanese and European banks. Many have increasingly strayed into dollar-denominated lending in recent years.... In Japan in particular, the spread between short- and long-term yen-denominated interest rates has been squeezed narrower and narrower over time, making dollar lending far more profitable. To fund that longer-term lending -- in the absence of dollar deposits -- foreign banks have used short-term CDs. The closures don't mean an imminent funding crunch. But they are still bad news for the banks, watching one of their limited avenues for profit in recent years slowly closed off." The article adds, "In March, the surge in borrowing costs for foreign entities trying to obtain dollars using cross-currency basis swaps was a result in no small part of investors pouring out of prime money-market funds, draining them of more than $150 billion. Issuance fell by than half from late February into March. This time, the immediate risk isn't that funding violently dries up again, but that the dollar business foreign banks have engaged in slowly comes to make less and less economic sense. That source of earnings will be sorely missed, given how few other options are available."
