MONEY MARKETS-Euro zone banks regaining access to U.S. lending

Thu Jan 3, 2013 6:06am EST

* U.S. lending to euro zone banks up for fifth month -Fitch

* ECB measures slowly restoring confidence in banking sector

* Lending still down vs May 2011, unlikely to rebound fully

By William James

LONDON, Jan 3 (Reuters) - Euro zone banks won better access to the vast pools of short-term dollar funding for the fifth month in a row in November according to a Fitch Ratings survey of U.S. money market funds.

Lending to euro zone banks by the 10 largest U.S. prime money market funds, which had a joint exposure of $670 billion, increased by 8 percent during November, Fitch said.

Analysts said the move showed that European Central Bank measures to shore up the euro zone's financial sector were slowly winning back the overseas investor confidence lost in 2011, during one of the worst phases of the euro zone debt crisis.

"The main reason is that the ECB is really backing any bank financing need and that has reduced the default risk for the banks... all that has reduced the risk perception for U.S. money fund investors," said ING strategist Alessandro Giansanti.

Access to U.S. money market funds, which Fitch said held assets worth $1.47 trillion, is crucial for euro zone banks, which need to borrow short term to pay for assets denominated in dollars.

This pool of liquidity can quickly dry up, leaving banks scrambling, as witnessed in late 2011 when confidence in the strength of euro zone banks crashed and the cost of dollar loans spiked.

That prompted the European Central Bank to act, flooding banks with long-term euro-denominated loans and opening up cheap credit lines to the U.S. Federal Reserve. This relieved the worst of the tension and bought policymakers time to plan structural reforms to the bloc's financial institution.

While the Fitch data shows this has been effective in restoring some credit lines into the euro zone, lending remains 60 percent below levels seen in May 2011.

"It is unlikely that (money market fund) exposures to euro zone banks will revert to end-May 2011 levels in the near term, particularly given European banking supervisors' efforts to limit banks' use of short-term U.S. dollar funding," Fitch said in the report.

New rules on banks' capital needs were also likely to curb issuance of the short-term dollar-denominated debt instruments popular with U.S. funds, limiting the extent to which trans-Atlantic lending will return, the report added.

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