* Money markets "sizably" exposed to European banks-Fitch
* Funds' exposure may be part of hunt for yield
* Reduced exposure could hit euro banks funding ability
(Adds industry details, analyst comment, byline)
By Chris Reese and Ross Kerber
NEW YORK/BOSTON, June 21 U.S. money market
mutual funds' holdings of European bank securities could become
a source of trouble if the region's debt problems keep
spiraling, industry specialists say.
Top U.S. money market funds have stayed heavily invested in
European financial institutions, Fitch Ratings said in a report
that covered the three months to May 31 and released on
Though tensions have eased recently, a debt crisis leading
to a default in a country like Greece or Portugal could hurt
the banks and in turn pressure the U.S. funds that supply much
of their credit.
The situation puts all parties in a quandary because the
banks need access to dollars, while the U.S. funds need
"Money funds are getting squeezed so badly domestically
because there is just no yield in any kind of money-market
instrument, so if they have the ability to invest
internationally, Europe is kind of a good idea from a
yield-grab perspective," said Thomas Simons, money market
economist with Jefferies & Co in New York.
Fitch's report reviewed holdings of the 10 largest U.S.
prime money market funds representing $755 billion in assets,
about half of which it found could be exposed to European
PRESSURES ON FUNDS
The questions come at a difficult period for the money
market mutual fund industry, dominated by big asset managers
like Fidelity Investments and Federated Investors (FII.N). Many
have waived fees amid low interest rates and operate under new
regulations after shocks during the financial crisis.
The companies now also have fewer places to invest, pushing
them toward Europe. Fitch said total asset-backed commercial
paper, once a mainstay security for money market funds, has
dropped to $380 billion from $1.2 trillion at the start of
2007. U.S. money funds "have still had a lot of money to
invest but they didn't have as many places to go," said Alex
Roever, managing director for JPMorgan Chase & Co.
Meanwhile, rates on obligations from European banks such as
BNP Paribas (BNPP.PA) and Credit Agricole SA (CAGR.PA) can run
ten basis points or more than what U.S. banks pay, money fund
One of the largest money funds is run by Vanguard Group
Inc. of Pennsylvania. Spokespeople there said the $110.6
billion fund, Vanguard Prime, held 21 percent of its assets in
certificates of deposit and commercial paper issued by European
banks as of May 31, up from 17 percent at the end of last year,
an increase driven by the shrinking pool of U.S. bank
The representatives added the fund holds no certificates of
deposit or commercial paper from French banks, among the
institutions facing the most scrutiny for their exposure to
LIKE JUNK BONDS
Simons compares the continued European money-market
exposure to a rally in junk bonds in recent years, where "even
though it is not a great investment it is one of the only
places where you can earn any money in fixed income."
Fitch said the funds it analyzed represented 45 percent of
the prime fund arena.
Exposure to French, German, and U.K. banks was constant
over the three-month period at 30 percent of assets, Fitch said
in the report. German bank exposure declined from 8.2 percent
to 6.3 percent of money market fund assets. French bank
exposure rose from 13.3 percent to 14.8 percent over the same
period. U.K. bank exposure rose from 8.6 percent to 9.7 percent
of money market fund assets.
However, money market funds' exposure to Italian and
Spanish banks has decreased since peaking in 2009. Exposure to
Italian banks dipped in the three-month period to 0.8 percent
from 1.5 percent. Exposure to Spanish banks was steady at 0.2
percent of total assets.
On the other side of this relationship, of the top 15 money
market fund exposures to global banks, money market funding
accounts for at least three percent of total deposits, money
market, and short-term funding for seven institutions, Fitch
That exposure level would be higher if the "full universe"
of prime money market funds were included beyond the 10 largest
funds, along with privately managed liquidity pools and
European U.S. dollar-denominated money funds with similar
"While the overall funding reliance on money market funds
might not appear significant, the potential withdrawal of money
market funding could create negative perceptions about an
institution's financial condition," Fitch said in the report.
NO SIGN OF A SQUEEZE
So far, money market funding has not shown evidence of
fears of a squeeze.
Benchmark three-month dollar London Interbank Offered Rates
(Libor) USD3MFSR= on Tuesday fixed at 0.2455 percent, down
slightly from 0.2465 percent on Monday and not far above the
record low of 0.2450 percent reached last week.
(Editing by Burton Frierson and Chizu Nomiyama)