Money Funds Cut Euro Area Bank Holdings Amid Crisis, Fitch Says

U.S. prime money-market funds, which offer short-term lending to corporations and banks, have reduced their lending to European banks as the region’s sovereign debt crisis mounts.

Euro-area banks represent about 12 percent of fund assets as of the end of May, down from about 30 percent at the same time last year, according to a report from Fitch Ratings. An increase in holdings of U.S. Treasury and agency debt, which exceeds 20 percent, is close to the levels at the height of the U.S. credit crisis, pointing to risk aversion according to a report from analysts led by Robert Grossman, head of Fitch’s macro credit research team.

The funds’ holdings of commercial paper issued by European banks reeling from the region’s fiscal turmoil are well below last year’s highs, while the area’s banks are also growing apprehensive about using this potentially volatile form of funding, the analysts wrote.

“The market’s perception of risk in the euro zone has increased dramatically over the last year,” Grossman said in a telephone interview. It’s unlikely that the amount of lending to the area will revert to last year’s levels, he said.

The banks have also been wary of using the money funds as a source of financing because they want to ensure the stability of the source of funding, Grossman said. Money-market mutual fund assets have declined in all months this year, according to data from the Washington-based Investment Company Institute.

The report analyzed holdings of the top-10 prime money- market funds, which account for 45 percent of all assets held by these funds in the U.S., according to Fitch. They also hold 10 percent of their assets in repurchase agreements that are secured by Treasury and agency securities.

“It reflects a level of conservatism or risk aversion which is a current state of mind among large investors,” Grossman said.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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