LONDON, Aug 23 (IFR) - European banks' access to US money
market funds deteriorated further in recent weeks, a Fitch
research note showed this week.
However, despite evidence of a reduction in the maturity
profile of US market funds' exposure, European FIG bankers were
relatively sanguine about the study's findings given the weak
backdrop. They added that a shortening of duration was a natural
move which did not necessarily herald a complete withdrawal of
"This isn't anything new," said one syndicate official.
"Going down to one week and below in particular is a pretty
natural reaction given the backdrop. The funds have shortened
duration but US liquidity hasn't completely dried up and this is
something we're seeing in Europe as well, in CP and other
markets: the liquidity is still there, it's just slightly
He added that the move should also been seen within the
regulatory context. "European funds have been under pressure to
reduce the average duration in their portfolios," he said.
"That's why it's been difficult for them to buy anything longer
than two years, which led to a declining bid in the bank FRN
This view was endorsed yesterday, in a note published by
Barclays. "The shortening of the duration of the operation is
typical in the phase of high uncertainty and it is not limited
to the US dollar funding," the bank's analysts wrote.
Meanwhile, an analyst at Fitch's fund and asset manager
which conducted the survey added that this did not mean that US
money funds were turning off the liquidity tap completely.
"Shortening maturity is one of the risk-limiting measures
open to money market funds," said Viktoria Baklanova. "They can
sometimes have a lot of comfort with credit fundamentals of
specific institutions, but volatility of credit spreads might be
such that funds focused on maintaining a constant NAV can't
afford that volatility."
However, a credit analyst at a large fund manager said that
it was still a negative sign. "It's kind of worrying and some
banks are a little bit too reliant on that market," he said. "I
am confident that if the US money market fund liquidity tap got
turned off, the big banks would have sufficient unencumbered
assets but it's not the greatest signal and some banks ongoing
reliance on the central bank is not right."
At the end of July, more than 20% of US funds' exposure to
French bank Certificates of Deposit was in the shortest maturity
bucket - seven days or fewer - a three-fold increase from the
end of June. At month-end June, more than half of French banks'
CD exposure was in the longest term bucket - 61 days or greater
- which, by the end of July, had declined to just a third.
The overall declining trend in US funds' exposure to
European banks, visible for at least two months, shows no sign
of being reversed. The 10 largest funds reduced their exposure
to them to 47% in July from a year high of 51.5% in May, the
second lowest percentage recorded by Fitch since the second half
The previous low was in the second half of 2008, when
exposure dipped to 45.4% of their assets under management.
"This is no surprise and is a typical knee-jerk reaction to the
current run of negative macro and microeconomic news coming out
of Europe," said another European FIG syndicate banker. "US
investors tend to respond to news as a group and tend to be
overly cautious about negative information from Europe because
it is not their core domestic market."
While the maturity-shortening trend was more pronounced for
the French banks, the Fitch research shows a proportionate
increase in the short-term maturity bucket and decrease in the
long-term bucket over the same period, which does not surprise
the banker quoted above.
"Given that it's not their core market, it is easier for
them to reduce exposure/maturity to all European banks that to
analyse each situation on a case-by-case basis," he said.
The Fitch research follows increasing concern over European
banks' access to dollar liquidity, following one institution's
USD500m call on the ECB's facility in the currency last week. In
their note, the Barclays analysts said that there is no sign of
stress at the short-end.
"Stress in the USD liquidity funding for the European banks
is mainly concentrated on long operations rather than at the
short ones, where US investors are still willing to lend to
European banks," they wrote. "Trading desks reported that for
European banks (even for French banks that have been under
pressure over the past few weeks) it is still relatively easy to
raise US liquidity up to a one-week term."
TAP STILL RUNNING
Market participants also point out that, while undesirable
from a confidence perspective, European banks' need for dollar
funding is low enough for them to be able to afford to draw down
ECB liquidity, even at the 100bp premium over market rates the
While the US short-term market is an important one for
European banks, the ECB facility is unlikely to be swamped with
demand, especially given that no-one is yet suggesting that
liquidity is likely to be withdrawn altogether by the US funds.
The top four European banks by reliance on US funds for
funding of their short-term liabilities are Rabobank, Nordea,
Credit Suisse and Barclays. As a proportion of their short-term
needs, US liquidity respectively accounts for 6.6%, 3.2%, 3% and
2.4%. For the big three French banks, 2.4% for SG and BNP
Paribas and 1.3% for Credit Agricole.
While not currently concerned about the position at the
short end of the money market, the Barclays analysts do see a
hazard in some European banks' access to term dollar funding.
They do not believe this is a problem for the larger
institutions, given their estimate that European banks have
placed USD1trn of deposits with the Fed, but believe the smaller
banks are vulnerable.
"The illiquidity of the term funding could become a serious
problem, especially for small European banks, which have no
liquidity buffer at the Fed and no access to the market. On the
other hand, we suspect the total amount of US dollar funding
they require is relatively small."
(Reporting by Matthew Attwood, Editing by Helene Durand)