Eurozone banks with dollar funding needs must feel like they are banging their heads against a wall.
With US money market funds on a slow but steady return to buying eurozone debt and regulations that threatened the funds’ business model having been binned, bank treasuries must have felt as if they were about to welcome back an old friend.
But now the Financial Stability Oversight Council (FSOC) — a Dodd-Frank wheeze that has a mandate to monitor financial stability — has taken up the regulatory baton. It is preparing a proposal that looks set to be in front of the Securities and Exchange Commission by March.
Among its suggestions will be floating net asset values, capital requirements and redemption restrictions. Unfortunately, these are all measures that are anathema to the US industry.
Funds seem to be getting ready for the change. Bank of America Global Capital Management on Monday joined other providers in beginning to post daily mark-to-market NAVs, although it will retain its one $1 constant share value.
This positioning is a clear sign that providers are trying everything they can to boost transparency in a hope that regulators will leave them to self-police. But reports have now surfaced that, in private, providers are resigned to losing the battle. Apparently they are now concentrating on reducing the severity of the new rules.
Judging by the swathe of letters to the FSOC from investors, businesses and other organisations asking for the retention of a stable NAV, any imposition of a floating NAV would lead to large outflows of cash from the funds.
The exact amount is anyone’s guess. But it would be bad news for European banks with a dollar funding need.
Many eurozone banks use US money funds for their short term dollar needs. But their access to the funds began dropping sharply from May 2011 as fears over the escalating eurozone sovereign debt crisis led US funds to jettison their eurozone bank holdings.
The banks responded in two ways: by raising debt in euros and swapping it into dollars — a costly exercise, given the euro/dollar cross currency basis swap at the time — and also by reducing their dollar needs.
Now US money funds are buying eurozone bank debt again, but if the new regulations come to pass and US investors start to quit money funds, that source of dollars could dry up once more. And this time it might be permanent.
To make matters worse, the damaging consequences of a floating NAV would come just as eurozone banks look like they are taking their first proper steps away from the crisis. The FSOC should tread carefully.