The biggest US money market funds have cut their lending to European banks to another record low while increasing their holdings of US government debt to levels reminiscent of those seen during the financial crisis. The 10 largest funds trimmed their short-term lending to European banks by 4 per cent on a US dollar basis between the end of November and the end of October, according to new data from Fitch Ratings.
That takes money market funds’ European bank exposure to a fresh low of about a third of their total assets of $645bn, down from 34.9 per cent at the end of October. At the same time, the funds have upped their holdings of US Treasuries and agency debt to 18.7 per cent of total assets of $645bn.
That is the highest amount since the first-half of 2009, when the holdings reached about 20 per cent of total assets. They were 19.8 per cent in late 2008. “To put so much money in Treasuries and agency securities in such a low interest rate environment illustrates how risk-adverse money market funds are at the moment,” said Robert Grossman, head of macro credit research at Fitch. The funds, key lubricants of the global financial system, predominantly lend to banks using certificates of deposit, commercial paper and repurchase, or ‘repo’ agreements. But trends in the types of loans being made to European banks also indicate increased reluctance to lend to the region.
While total exposure to the eurozone has been falling, the funds have also been increasing their use of secured lending to the region’s financials in another sign of risk aversion. At the end of November, so-called repos accounted for 27 per cent of total European exposure, up from 17 per cent at the end of August and just 10 per cent back in late-2008. European banks need US dollar lending from the funds to help finance their vast portfolios of dollar-denominated assets.
Some French banks have already indicated that they might seek to sell dollar-funded assets amid financing pressure while central banks have offered to step in to fill the dollar funding gap. Lending to French banks fell 63 per cent between October and November. Total exposure declined to $12.9bn, or 2 per cent of total assets, down from 15.1 per cent of assets back in May. “These shifts in exposure serve as a reminder of the potential volatility of short-term wholesale funding,” said Fitch’s Martin Hansen. “Banks have to access new sources of dollar funding or deleverage their dollar-based lending and financial activities.”