Bloomberg News

European Bank Debt Dominates U.S. Money-Market Funds’ Assets

June 21, 2011

(Adds analysts’ comments in fifth and eighth paragraphs.)

June 21 (Bloomberg) -- The top U.S. prime money-market funds have about half their assets in securities issued by European banks, according to a report by Fitch Ratings.

The 10 largest funds eligible to purchase securities from corporations concentrated 31 percent of their holdings as of May 31 in debt, deposits and repurchase agreements with banks in France, Germany and the U.K., up from 30 percent three months earlier, the London-based ratings firm said. Deutsche Bank AG, based in Frankfurt, was the biggest issuer, accounting for 4.5 percent of the funds’ assets.

European banks have worked to reduce their risk to Greece over fears the Mediterranean country may default on its debt, and to other countries that may be vulnerable if the crisis spreads. The Bank of International Settlements estimated European lenders held $136.3 billion in loans to Greece at the end of 2010 and almost $2 trillion to Portugal, Ireland, Spain and Italy.

Money-market fund holdings of European debt have risen from 38 percent of assets since the second half of 2006 to about 50 percent at the end of May, driven by the banks’ demand for dollar-based holdings and narrowing investment opportunities for the funds, Fitch said.

Fund managers have reduced risk by shortening maturities and increasingly collateralizing their holdings, Viktoria Baklanova, a New York-based analyst at Fitch, said in a telephone interview.

Reduced Exposure

Maturities are “generally limited to three months,” while the proportion of holdings made up by collateralized repurchase agreements has increased, she said without providing more detailed figures.

Standard & Poor’s estimated that 80 percent of European bank holdings is limited to three months or less, and 95 percent to six months or less among the 500 U.S. and European money funds it rates.

“A lot of funds aren’t adding exposure, or if they are it’s real short and in highly diversified positions,” Peter Rizzo, senior director of fund services at S&P in New York, said in a telephone interview.

Of the European holdings broken down by individual banks, 45 percent comprise 1 percent of the funds’ assets and 25 percent comprise between 1 percent and 2 percent, Rizzo said.

The supply of securities that U.S. prime funds can and want to purchase is limited and the shortage may grow more serious if turmoil forces them to withdraw from European banks, Baklanova said.

‘A Big Bind’

With fewer U.S. issuers, the amount of outstanding asset- backed commercial paper has declined to $380 billion from $1.2 trillion in 2007, the Fitch report said.

“They are in a big bind,” Michael Krasner, managing editor of research firm iMoneyNet in Westborough, Massachusetts, said in a telephone interview. “They are being severely challenged at the moment to find securities to buy and hold.”

The Fitch report analyzed a sample of the 10 largest U.S. prime money-market funds, representing $755 billion, or 45 percent of the total U.S. prime money-market funds.

Deutsche Bank was followed as the biggest issuer by BNP Paribas SA at 4.1 percent and Amsterdam-based Rabobank Group at 3.8 percent, Fitch said. No U.S. banks were in the top 10.

Among European nations, funds had the highest concentration in debt from French banks at about 15 percent, followed by U.K. banks at 9.7 percent, according to the report. Funds had no holdings in Ireland or Portugal at the end of May, while Italian bank holdings fell to 0.8 percent from 1.5 percent and Spanish holdings remained at 0.2 percent.

--With assistance from Aaron Kirchfeld in Frankfurt. Editors: Steven Crabill, Steve Bailey

To contact the reporters on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net


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