US money funds see value in European banks

Growing confidence in a European recovery has persuaded big US money market funds that it is safe to start lending again to eurozone banks – but not all of them.

“The furore over whether the euro will exist has to a large degree died down [and European banks] have made a lot of progress with regard to their credit issues,” says Deborah Cunningham, chief investment officer for global money markets at Federated Investors. “Their relative value [to banks elsewhere] is worth it.”

But some banks are more creditworthy than others. “We’re not even close to [lending to] peripheral [banks] … we’re only lending to the central bank equivalents of each country,” says Ms Cunningham.

In the summer of 2011, as the European debt crisis began to gather steam and the possibility of bank failures in Greece loomed large in investor minds, US money market funds sharply cut their exposure to banks in the eurozone.

Historically crucial providers of short term financing to European banks, the funds are now piling back in: lending to eurozone banks has grown by 9 per cent since the start of the year while lending to US banks has fallen by 13 per cent over the period according to JPMorgan.

Banks in Australia, Canada and Japan may be perceived as safer, but in a yield-starved world funds have also begun to pay more attention to the relative income on offer in Europe.

“There is a pricing advantage for money markets in the eurozone, even if the banks are not perceived as the safest,” says one London-based banker.

In the first half of the year, the 10 biggest US money market funds allocated about 15 per cent of their $652bn in assets to short-term deposits and debt securities with eurozone banks, according to Fitch, the credit rating agency.

That is nearly double the nadir in June 2012 when fears over a eurozone break-up reached fever pitch. But it represents about half the levels seen between 2006-11 when US MMFs regularly allocated about 30 per cent of their assets to eurozone banks.

“The pressure promoting this new equilibrium is coming from both sides,” says Robert Grossman, managing director of macro credit research at Fitch. “Banks have a reduced need to borrow reinforced by regulation and from a MMF perspective it’s an improved posture [from before] but they’re still cognisant of a lingering risk.”

The withdrawal of money market funds from the eurozone in 2011 reflected their experience during the US financial crisis, when a freeze in short-term lending markets forced some funds to “break the buck”, or pay back less than their stable $1 per share price. A stable price was a key feature of the funds and had created an expectation of safety, so the threat of possible losses led to a destabilising rush of withdrawals.

While periphery banks saw their MMF lending dry up en masse, French banks were also hit because of concerns over their support of Greek subsidiaries.

For many European banks it is a case of “once bitten, twice shy”.

“European bank regulators have told banks to be cognisant of where they get their short-term funding,” says Mr Grossman. “In addition, the sharp outflows in the second half of 2011 are still fresh in the minds of those banks, pointing to the potential volatility of MMF funding and how quickly it can withdraw.”

Although MMFs began trickling back last year following the pledge by Mario Draghi, European Central Bank president, to do “whatever it takes” to save the euro, European banks have reduced their short-term dollar funding.

Although the banks will not disclose their reliance on US MMF funding, data from the Bank of International Settlements shows that overseas lending by French and German banks fell by $1tn – or 23 per cent – from July 2011 until the end of 2012. Much of that, say analysts, would have been dollar lending, and a reduction in lending reduced the need to borrow from US MMFs.

Over the same period German banks’ MMF funding dropped by 57 per cent and French banks’ MMF funding by nearly half, according to Fitch.

French banks have been the principal beneficiaries of the US MMFs resurgent lending, with allocations to them up by 255 per cent since mid-2012 according to Fitch. UK, Dutch and German banks have also enjoyed higher MMF allocations recently according to figures from Citi, in line with the ultra-conservative funds’ “core only” strategy.

In 2011-12 US MMFs restricted their lending to very short maturities, largely reluctant to lend beyond a month at a time.

Alex Roever, head of US interest rate strategy at JPMorgan, says US MMFs are becoming more comfortable with lending over longer periods to French banks in particular. But their exposure to the eurozone overall is limited to a handful of big players.

“A year ago, US MMF participation with French banks was heavily concentrated in one month tenors and less, and now there’s more three and six month lending,” he said. “But overall their participation is focused on a handful of large institutions. Before the sovereign crisis in peripheral Europe, there were a larger number of banks that US MMFs would lend to, and they haven’t regained confidence in some of the banks in Italy and Spain.”

Πηγή: Financial Times