However, it will be born in the US and caused by risk managers in NYC or Chicago or even Charlotte, North Carolina. Who have most likely ran a series of Monte Carlo scenarios and have decided to be first to act players.
In simple terms, the US is cashing out its risk based chips, and in doing so it is draining the last liquidity out of the Core European banking system. Dexia was the first, and before this is over, it is my opinion that most of the major French banks will be nationalized / recapitalize.
While US banks have significantly different reporting methods then European banks, there is no arguing a simple issue. US banks have a surplus of deposits in them, which European Banks have used to fund longer term banking loans.
If you remove the US deposits via commercial paper deposits in Europe, you will drain the European banking structure of all liquidity. They will have long-term assets for sale in near term pricing squeezes. The implications for summer 2012 are becoming interesting.
In the US, Americans have access to a multitude of different accounts, many with similar sounding names. This article is about the difference in MMA vs MMF and the quick and dirt implications of what they mean.
Money Market Accounts Vs Money Market Funds
The difference in the names is minor, the difference in the way that risk is treated is significant. When you have your funds sweep-ed into a higher yielding account. If it is an MMA account, your balance is insured by the FDIC up to 250,000 each (or so depending on balance structures in like registered accounts).
However, if your bank or brokerage account has sweep your funds into an MMF account (Money Market Funds). You have no assurance you will get your funds back. There is no FDIC insurance on MMF accounts or their holdings.
When US banks were looking for commercial paper yield to augment the extremely low rates available in the US banking system, they found it in French and European banks who issue commercial paper. These banking IOUs are issued unsecured and good for a time period of 1 to 270 days.
What few Americans realized is that their local bank was taking their money market fund cash and buying European banking paper to augmenting the MMF yield. Forbes has an article quoting a Fitch report that came out on Friday.
The problem is increased risk aversion by U.S. MMFs, which have been consistently reducing their exposure to Europe. A report by Fitch Research released on Friday (see below) shows that of the top 10 largest U.S. MMFs, which hold $654 billion in assets, total European holdings fell 14% through September and is now down 37% since May. The 10 largest MMFs hold $246.56 billion in European assets, about 38% of their total holdings. “The current exposure level is the lowest in percentage terms for European banks within Fitch’s historical time series, which dates back to the second half of 2006,” read the report.
MMFs fled French banks, cutting their exposure from 11.2% at the end of August to 6.7% at the end of September, a 42% monthly decline. At its peak, back in the second half f 2009, MMF exposure to French institutions totaled 16.4%. As MMFs reduce their exposure to French banks, they have also moved toward shorter maturities.
The US MMF risk managers are trying to unwind their exposure to what is coming. It will be interesting to see how much exposure is unwound before Core Europe has to acknowledge that it needs to recapitalize its banks sooner rather then later.
So while there is lots of EU ministers talking about the status of the Sovereign debt crisis, as an American reader you might want to be checking on the status of your MMF, and moving it to an MMA.
This would be specifically important if you happened to be an American investor or trader who keeps a large percentage of your brokerage account in cash over night. It wouldn’t be much fun to go to bed in cash and wake up to find out your MMF was given a 30% hair cut over night due to European banking crisis being solved at your expense.
Update: Links updated to include Fitch report directly.