Even as European investors race to abandon shares in French banks, on this side of the Atlantic banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments.
In August, American money funds and other suppliers of short-term credit chose not to refinance roughly $50 billion of debt issued by European banks, a drop of 14 percent, according to JPMorgan research. Traders are so worried that they are forcing French banks like Société Générale and BNP Paribas to pay more to borrow dollars.
“Money market managers in the U.S. continue to prune risk,” said Alex Roever, who tracks short-term credit markets for JPMorgan Chase. “The issue is headline risk; fund managers may be comfortable with the banks’ credit, but many are hearing from shareholders worried by what they have read about French banks.”
Unlike their American counterparts, France’s biggest banks are more dependent on short-term funding. Money market funds in the United States have been among the biggest lenders, lending $161 billion to French banks in August, although that is down 39 percent from a month earlier.
“It hasn’t been a wholesale pullback,” Mr. Roever said. In 2008, after the collapse of Lehman Brothers, when a key money market fund sustained huge losses on Lehman debt and investors started pulling their money out of the funds, he said, “everybody shut off at once. It was like a cliff. This time the pullback has been more gradual.”
It’s not just money market funds that are getting cold feet.
On Wall Street, some big American banks have become wary of derivatives tied to French banks like Société Générale and BNP Paribas, several traders said. The two French giants are major international players in the derivatives arena, so a pullback would hurt egos and the bottom line of both companies. Derivatives are investment instruments whose value is tied to another underlying security.
And since last month, according to several bankers who insisted on anonymity, hedge funds and others firms have also withdrawn hundreds of millions of dollars from prime brokerage accounts held at French banks. Prime brokers hold assets for hedge funds and other investors, while providing loans for increased leverage on their bets.
While still small, this kind of transfer echoes the larger move hedge funds made as Lehman teetered in 2008, when a tidal wave of withdrawals helped sink the bank.
Not everyone is anxious. Some money market giants like Fidelity and Federated Investors are sticking with French banks despite the increased anxiety. At Federated, which has $114 billion under management in prime money market funds, about 13 to 17 percent of assets remain invested in French bank debt, according to Deborah Cunningham, a senior portfolio manager at Federated.
“We’re always rethinking it and assessing it, but we’ve not come up with a different answer,” she said. “We don’t feel there’s any jeopardy with regard to repayment.”
At Fidelity, which manages a total of $428 billion, Adam Banker, a spokesman, said, “We’re very comfortable with our money market funds’ European bank holdings, including French bank holdings.” As capital becomes more costly or scarce for European banks, the resulting rise in their borrowing costs risks impairing their own ability to lend, economists warn. That threatens to undermine the general economic growth prospects of already-weakened nations like Italy and France, which in turn would make the banks’ position worse.
Eric Dash and Julie Creswell contributed reporting.
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