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 liquidity.
“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 shorter.”
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 market.”
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 of 2006.
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.”
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 bank demands.
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)