US prime money market fund (MMF) exposures to Eurozone banks declined moderately as of end-May 2012, according to a new report by Fitch Ratings. Eurozone exposures account for approximately 12% of total MMF assets in Fitch’s sample.
MMF exposures to Eurozone banks have fluctuated within a fairly narrow range over the past few months, averaging approximately 12% since end-November 2011. This trend followed a sharp decline in the second half of 2011.
This relative stability is consistent with Fitch’s prior view that MMF allocations to Eurozone banks are unlikely to retrace their mid-2011 levels, a ‘partial disengagement’ stemming both from ongoing MMF risk aversion to this sector as well as heightened caution by some European banks and their regulators on the use of this potentially volatile form of funding.
‘The slight increase of MMF allocations to Eurozone banks during the first two months of 2012 proved short-lived as positive momentum from policy actions gave way to ongoing investor concern about the region,’ says Robert Grossman (pictured), Managing Director and head of Fitch’s Macro Credit Research team.
According to Fitch Solutions indices, CDS spreads for European banks tightened in the first few months of 2012, during which MMF allocations to Eurozone banks began to increase from their year-end 2011 low. Roughly 10% of MMF assets in Fitch’s sample are in the form of repos collateralised by Treasuries and Agencies, indicating in effect that more than 30% of MMF assets represent Treasury and Agency exposure when direct holdings are also considered. For the first time, Fitch’s study provides time series data on the share of repos that are collateralised by Treasury and Agency securities.