Top U.S. Money Funds Choose Swiss Banks Over Germany’s

The 10 biggest prime U.S. money market funds redirected investments from German to Swiss banks in March as Swiss banks’ funding needs rose and the euro- region’s sovereign debt crisis flared up again.

The funds’ holdings in the two largest German banks fell by 30 percent while ownership of securities issued by Swiss banks increased by about the same rate, according to a monthly survey by the Bloomberg Risk Newsletter. U.S. money funds have nearly tripled their holdings of Swiss bank debt since 2010, a period in which they have drastically cut holdings of euro zone debt.

Money fund holdings of European bank debt have come under scrutiny by U.S. regulators worried that risks taken by the $2.6 trillion industry pose a threat to financial stability. Federal Reserve Bank of Boston President Eric Rosengren said this week that European bank holdings represented a significant source of risk.

In evaluating “risk from unexpected problems in Europe, money-market funds remain an important potential transmission channel to the United States,” he said during a speech in Stone Mountain, Georgia.

U.S. money funds gradually decreased their holdings in European bank paper through most of last year. Italian and Spanish bank holdings have been reduced to zero, while French bank debt has declined to $16.6 billion from $89.6 billion since 2010. French banks reversed the decline in February, with holdings of paper issued by the four largest institutions increasing by $9.4 billion to $18.2 billion. March witnessed a 9 percent decline in those holdings.

Deutsche Bank

Lending to Deutsche Bank AG (DBK), Germany’s largest, fell by $4.4 billion in the month, and Commerzbank AG (CBK) holdings were cut by nearly $1 billion to $488 million. As a whole, German bank securities fell by $5.4 billion in the month to March 31, to $12.4 billion.

“In light of the new liquidity regulation to be introduced by Basel III, Commerzbank is proactively reducing its short-term funding and is relying even more on long-term funding sources as for example its strong retail deposit base,” Maximilian Bicker, a spokesman, said in an e-mailed statement.

Swiss bank funding rose by $8.9 billion to $39.2 billion. The jump was driven mostly by an $8 billion jump in holdings of UBS AG (UBSN) debt to $20.3 billion, representing a 65 percent increase in March.

Deborah Cunningham, head of money market funds at Pittsburgh-based Federated Investors Inc. (FII), said she believed euro-zone worries didn’t drive the shift.

‘Better Offerings’

“Choosing Swiss bank offerings instead of securities from German banks isn’t a repositioning, but simply a reflection of more and better offerings from the Swiss banks recently,” she said in an e-mailed statement.

A global banking review by rating company Moody’s Investors Service Inc. announced on Feb. 15 may have influenced money market funds’ bank holdings this year, according to JPMorgan Chase & Co. (JPM) analyst Alex Roever in a note published April 11.

“Moody’s rated funds reduced exposures to those issuers that could potentially become P-2 by $21 billion between January month-end and March month-end,” said Roever in the report.

Commerzbank’s short-term rating of P-1 is on review for downgrade by Moody’s, while Deutsche Bank’s is not, according to information published on the rating company’s website. P-1 and P-2 are the highest and second-highest rating Moody’s assigns to banks for their money market securities.

‘Holy Grail’

A second longer-term refinancing operation from the European Central Bank has failed to prevent a deterioration in prices for Spanish and Italian government bonds. Bank stocks have fallen on speculation that Spain may require a bailout from other European countries. The Bloomberg Europe 500 Banks and Financial Services Index declined 10 percent between the end of February and April 12.

“We always thought the sovereign crisis would re-emerge as we approached the second half of 2012 after a justifiable honeymoon period in the first six months,” said Jim Reid, a strategist at Deutsche Bank in a note to clients on April 11. “It’s difficult to say whether this is the start but it’s at least becoming clear that the LTROs were very powerful but were not the Holy Grail,” he said, referring to the central bank’s refinancings.

Prime funds are those eligible to buy securities not guaranteed by the U.S. government. Assets of all prime U.S. funds totaled $1.4 trillion as of April 10, according to research firm iMoneyNet in Westborough, Massachusetts.

The survey included Fidelity Cash Reserves, JPMorgan Prime Money Market Fund, Vanguard Prime Money Market Fund, Fidelity Institutional Prime Money Market Portfolio, Fidelity Institutional Money Market Portfolio, BlackRock TempFund, Federated Prime Obligations Fund, Schwab Cash Reserves, Western Asset Institutional Liquid Reserves and Dreyfus Cash Management Fund. The funds managed $667.6 billion in assets at the end of March, according to the filings.

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

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Nicholas Dunbar at ndunbar1@bloomberg.net

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