French Overtake U.K. Banks for U.S. Money Fund Investment

The 10 largest U.S. money-market funds’ holdings of French bank securities overtook their British counterparts for the first time in at least 16 months on growing confidence in the euro region and cheap U.K. state funding that lessened the need to issue short-term debt.

The funds’ French bank holdings increased by $9.6 billion to $42.8 billion in December, while British banks were cut by $11.2 billion to $29.4 billion, according to a survey of the fund bank holdings by Bloomberg Brief: Risk Newsletter. The bank with the largest increase was Natixis SA, the investment-banking unit of Groupe BPCE, France’s second-largest lender by branches.

Holdings of French bank securities by U.S. money funds have recovered to the highest since August 2011, when investors were dumping French paper on concern that the European debt crisis was putting banks’ health at risk. In the U.K., the Funding for Lending Scheme from the Bank of England has allowed lenders such as Royal Bank of Scotland Group Plc to reduce their use of money funds and more expensive shorter-term senior bonds.

“Prime money market funds have slowly crept back to French banks over the course of 2012, highlighting the significantly lower funding risks emanating out of Europe,” JPMorgan Chase & Co. analyst Alex Roever said in a Jan. 10 report. “Barring any hiccups out of Europe, we expect this trend to continue in


Natixis attracted an extra $6.76 billion in December, the largest nominal increase among the 40 banks included in the survey. The 10 funds now hold $11.68 billion in Natixis paper. The largest reduction among the banks was in RBS securities, which declined by $7.35 billion in the month.

Safety Margins

The other French banks included in the survey were BNP Paribas SA, Societe Generale SA and Credit Agricole SA. Bank restructurings have reduced the overall level of demand for money market funding, meaning the December total is still less than half the nearly $90 billion the four French banks said they held for the second half of 2010.

Banks have increased liquidity reserves to match their use of short-term funding. Natixis’s parent, BPCE, had 117 billion euros ($153.3 billion) of total short-term refinancing outstanding at the end of September, according to its Nov. 14 third-quarter earnings presentation. Its liquidity reserves increased to 150 billion euros at the end of the third quarter, up from 133 billion euros on June 30.

“We don’t think we’re living through a time during which we could reduce safety margins when it comes to liquidity,” Jean Cheval, director of finance and risk at Natixis, said on a Nov. 15 earnings call with analysts. “We do not consider that we need to increase this buffer significantly, but we think that we are at the right level today.”

RBS Reductions

Andrea Pucnik, a spokeswoman at Natixis, declined to comment further.

Fidelity Investments, the biggest provider of U.S. 401(k) retirement plans, has three funds included in the survey. Among them, they increased holdings of Natixis by $7.31 billion in December. JPMorgan’s Prime Money Markets Fund boosted its holdings of the French bank by $1.47 billion. Officials at Fidelity and JPMorgan didn’t respond to requests for comment.

RBS reduced its overall use of short-term wholesale funding by 53 billion pounds ($84.9 billion) in the first nine months to 49 billion pounds, according to a Nov. 2 presentation on the day of the government-controlled bank’s third-quarter results. The bank holds a 147-billion-pound liquidity buffer to cover short-term borrowing.

Liquidity Buffer

“This now represents only 5 percent of our funded balance sheet, well below our peer group.” Bruce Van Saun, finance director at RBS, said on the Nov. 2 earnings call. “The liquidity buffer cover of short-term wholesale funding rose to three times from 2.5 times at the half year.” An RBS spokeswoman declined to comment further today.

In addition to selling commercial paper, certificates of deposit and repurchase agreements to money funds, banks can obtain short-term funding from central banks, interbank repurchase agreements, or by increasing deposit rates to attract more money from individual customers. Banks also hold cash-like instruments in a liquidity pool to meet redemptions.

The funds surveyed were Fidelity Cash Reserves, JPMorgan Prime Money Market Fund, Vanguard Prime Money Market Fund, Fidelity Institutional Money Market Portfolio, Fidelity Institutional Prime Money Market Portfolio, BlackRock TempFund, Federated Prime Obligations Fund, Schwab Cash Reserves, Western Asset Institutional Liquid Reserves and Dreyfus Cash Management Fund. Together, the funds manage $712 billion in assets as of the end of December, including repurchase agreements backed by government debt.

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