Largest U.S. Money Funds Shun Italian, Spanish Banks, Favor Swiss Assets

The six largest U.S. money market funds have eliminated their lending to Italian and Spanish banks, reduced investments in French banks and are favoring Swiss securities for their $511 billion of assets.

Holdings of European bank certificates of deposit, repurchase agreements and commercial paper reported by the six largest funds managed by JPMorgan Chase & Co. (JPM), Fidelity Investments, Federated Investors Inc. (FII), Blackrock Inc. (BLK) and the Vanguard Group Inc. show they are shunning euro-region banks, according to data compiled by Bloomberg.

European bank shares tumbled to the lowest since March 2009 on Aug. 10, led by Paris-based Societe Generale SA, amid concern that France’s creditworthiness was in doubt. U.S. prime money funds have reduced European debt holdings by $38 billion to $340 billion in July, according to an Aug. 9 report by JPMorgan.

“The serious risk here is a sudden loss of confidence,” Royal Bank of Scotland Group Plc analysts including Stefan Stalmann wrote in a note to clients yesterday. “No bank can exist when counterparties lose confidence and withdraw their funding -- even if the loss of confidence is triggered for the wrong reasons.”

The six U.S. funds had completely exited positions in the two largest Spanish and Italian banks at the end of July and had cut back their lending to French banks, according to the survey to be published in today’s Bloomberg Risk newsletter. The funds included were: the JPMorgan Prime Money Market Fund, Vanguard Prime Money Market Fund, Fidelity Cash Reserves (FDRXX) Fund, Fidelity Prime Money Market Portfolio Fund, BlackRock TempFund, and the Federated Prime Obligations Fund.

Photographer: Doug Kanter/Bloomberg

Financial markets are overreacting to concerns that French banks might suffer from exposure to their nation’s sovereign debt, Institute of International Finance managing director Charles Dallara said yesterday. Close

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Photographer: Doug Kanter/Bloomberg

Financial markets are overreacting to concerns that French banks might suffer from exposure to their nation’s sovereign debt, Institute of International Finance managing director Charles Dallara said yesterday.

Swiss Holdings

The moves are a leading indicator of risk appetite among the world’s most liquid money market funds, which have been suffering investor outflows because of their exposure to European banks. Money market funds in the U.S. had a net outflow of $37.7 billion in the four weeks ended July 20, according to a report from analysts at Societe Generale.

Swiss bank holdings jumped 208 percent to $18.7 billion in the period, according to the sample, which surveyed exposure to the 10 largest banks in continental Europe by market value. The Fidelity Cash Reserves Fund boosted its exposure to Credit Suisse Group AG, the second-biggest Swiss bank, by 1,851 percent to $4.8 billion. Holdings in Spain and Italy’s largest banks dropped to zero from $20 billion in the same period.

Deposits and instruments in French banks climbed 14 percent in the second quarter, before reversing in July, when holdings fell by 10.2 percent on the year-earlier period, filings show.

French Banks

“Despite the fact that the banks are money good and there’s no credit risk, within the money-fund world we are susceptible to headline risk,” said Kevin Kennedy, a portfolio manager at Legg Mason Inc. (LM)’s bond unit Western Asset Management. “France has been identified as the big risk going forward should the dominoes start to fall.”

Western Asset’s money funds held about $1.4 billion of commercial paper from French banks at the end of July, according to data from JPMorgan.

Federated still uses French banks, Deborah Cunningham, chief investment officer for money markets for Pittsburgh-based Federated, said in an e-mail. “Federated continues to be comfortable with the European banks that we own and believe they offer money-market funds a high-quality investment that represents minimal credit risk,” she wrote.

Vanguard, the Valley Forge, Pennsylvania-based mutual-fund manager, got out of most debt issued by European banks in 2010 when sovereign debt issues first surfaced, said David Glocke, head of taxable money market funds at Vanguard Group.

Move to ‘Sidelines’

“We thought it was best to move to the sidelines rather than stay in the game,” Glocke said. Vanguard had $165 billion in money market funds at the end of July, according to Crane Data LLC.

Fidelity Investments, the biggest U.S. manager of money- market funds, said its cash funds don’t have “direct exposure” to banks based in Greece, Ireland, Portugal, Spain or Italy.

The firm only invests in 50 or so of Europe’s “strongest financial institutions,” Adam Banker, a spokesman for Boston- based Fidelity, said in an e-mail. Fidelity had $411 billion in money market funds as of July 31, according to research firm Crane Data. Officials at JPMorgan and Blackrock declined to comment.

Financial markets are overreacting to concerns that French banks might suffer from exposure to their nation’s sovereign debt, Institute of International Finance managing director Charles Dallara said yesterday. After plunging 15 percent on Aug. 10, Societe Generale (GLE) rose 3.7 percent yesterday.

Societe Generale

French banks may have 4 billion euros ($5.7 billion) to 5 billion euros less funding available than a “couple” of months ago after U.S. prime money funds declined since the end of May, the RBS analysts said. French banks may be able to use alternative sources of dollar funding, reduce dollar-denominated trading assets, tap into their liquidity reserves or raise funds in euros and swap them into dollars, the analysts said.

Officials at Societe Generale couldn’t immediately comment. A spokeswoman for BNP Paribas (BNP) referred to the bank’s Aug. 2 earnings, in which the lender said it has access to diversified funding sources and had seen “significant extension of the average maturity of short-term funding since the crisis.”

UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s biggest banks, said in their second-quarters earnings that their year- on-year growth in deposits showed the resilience of their capital base. Officials at Intesa declined to comment further, while a spokesman for UniCredit didn’t immediately respond.

“We could even do without the wholesale market for the rest of the year and for 2012, even though this is not our intention,” Intesa said in its earnings presentation.

To contact the reporters on this story: Radi Khasawneh in London at rkhasawneh1@bloomberg.net

To contact the editor responsible for this story: Ted Merz in New York at tmerz@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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