The 10 biggest prime U.S. money- market mutual funds decreased holdings of Barclays Plc (BARC) by $6.65 billion in April, the largest drop in dollars for any bank, ahead of a potential downgrade for the London-based company.
Holdings of securities issued by Frankfurt-based Deutsche Bank AG (DB:US) rose by $5.12 billion over the month, the most among European banks, according to data compiled by Bloomberg. Holdings of German banks increased by $5.88 billion, while those of U.K. banks declined by $6 billion.
Moody’s Investors Service (MCO:US) said on April 13 that banks including Barclays and Bank of America Corp. (BAC:US) had their short- term rating under review as part of a wider assessment of the industry. Separately, the U.K. Independent Commission on Banking is recommending that banks segregate consumer operations from investment banking and subordinate unsecured creditors to individual depositors.
“The short-term rating downgrades could have a greater near-term impact via impact on certain types of funding,” said Kinner Lakhani, analyst at Citigroup Inc., in an April 30 report. “This is especially true for money-market funds which cannot typically purchase commercial paper from entities rated P-2 or lower.”
P-2 is the second-highest rating for short-term debt issuers.
The bank commission’s move to segregate assets, if confirmed in a white paper published next month, could make it harder for U.K. banks to rectify the effects of a downgrade when the rules come into force in 2015, Amit Goel, an analyst at Credit Suisse Group AG, wrote in a May 9 report.
U.S. money funds reduced holdings in Barclays to $23.9 billion as of April 30 from $30.6 billion a month earlier.
The bank increased its pool of liquid assets, including central bank deposits, to 173 billion pounds ($279 billion) at the end of the first quarter, from 152 billion pounds at the end of last year, according to a filing.
Barclays Bank, which issues the short-term paper held by the money-market funds, retains the highest short-term rating and isn’t under review by Moody’s. Even after the April decline, Barclays is the most reliant on money-market funding of any bank globally, according to the Bloomberg survey of 38 large banks.
Money-fund holdings of short-term Deutsche Bank paper rose to $17 billion from $11.9 billion, a 43 percent increase. The increase in Deutsche Bank securities reduces their need to fund dollar operations through the more expensive derivatives market.
Deutsche Bank holdings had fallen by $4.4 billion during March. Less funding from money markets implies an increase in the use of basis swaps, a way for banks to exchange their euro- denominated capital into dollars to fund loans.
The bank booked a 319 million-euro ($413 million) charge in the first quarter because of “technical” accounting effects, according to the April 26 filing.
“Approximately half of this arises as a consequence of the bank using euro borrowings to fund U.S. dollar assets by swapping the euro borrowings into U.S. dollar in the basis swap markets,” Stefan Krause, the bank’s chief financial officer, said that day on an earnings call.
Giles Croot, a spokesman at Barclays, and Armin Niedermeier, a spokesman at Deutsche Bank, declined to comment.
The funds’ holdings in all European banks declined by $4.2 billion in April to $187.5 billion, according to the survey.
Prime money funds are eligible to purchase debt and other securities issued by corporations and banks, as opposed to funds that invest exclusively in U.S. government-backed debt.
Outside of Europe, Bank of America holdings declined the most, by $4.42 billion.
Japanese banks attracted $2.77 billion, the largest amount of new investment after Germany.
The survey included Fidelity Cash Reserves, JPMorgan Prime Money Market Fund, Vanguard Prime Money Market Fund, Fidelity Institutional Prime Money Market Portfolio, Fidelity Institutional Money Market Portfolio, BlackRock TempFund, Federated Prime Obligations Fund, Schwab Cash Reserves, Western Asset Institutional Liquid Reserves and Dreyfus Cash Management Fund.
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