U.S. prime money market funds (MMFs) continued to increase their exposure to Japanese banks while exposure to eurozone banks also grew moderately, according to Fitch Ratings' latest research on MMF holdings as of end-July 2012.
As of end-July, exposure to Japanese banks represented 12.3% of total MMF holdings, an increase of 9% since end-June 2012 and a 118% increase since end-May 2012. Japanese bank exposure exceeds aggregate MMF allocations to eurozone banks, which constitute 8.5% of total MMF assets as of end-July. Although rising by 9% in July, eurozone exposure remains 76% below end-May 2011 levels on a dollar basis. U.S. banks remain the largest single-country exposure at 12.4% of MMF assets.
Fitch believes the 'disengagement' between MMFs and eurozone banks appears to be persisting. MMF risk aversion is continuing, reflected by their allocation of about one-third of total funds under management to Treasurys and agencies, including both direct holdings and repos. In addition after the sharp pullback in funding from MMFs during the second half of 2011, both eurozone banks and their regulators appear cautious towards this potentially volatile form of funding.
Eurozone banks' reduced appetite for MMF funding is likely reinforced by some of these institutions' ongoing deleveraging of U.S.-dollar-denominated assets and activities. For example, there is a potential parallel between declining MMF allocations to eurozone banks since end-May 2011 and the declining market share of eurozone institutions among the most active project finance deal arrangers.
The 15 largest exposures to individual banks comprise approximately 43% of total MMF assets.