US frets over bank exposure to Europe

A taxi owner holds a Greek flag in front of the Greek parliament © AFP Louisa Gouliamaki

AFP

WASHINGTON (AFP) – US banks and money market funds have significant indirect exposure to Europe’s debt crisis via European banks, according to a report by a US banking regulator Tuesday.

The first annual report of the Financial Stability Oversight Council, which includes officials from the Federal Reserve and US Treasury, said US banks have “very limited net direct exposure” to government bonds from Greece, Portugal and Ireland, the three countries under joint European Union-International Monetary Fund rescue operations.

However, “They have larger exposure and important ties to major financial institutions elsewhere in Europe that in turn have large exposures to Greece, Ireland, and Portugal,” the report warned.

It cited exposure to core European banks in the United Kingdom, Germany, and France.

“And those European banks are the primary international lenders to peripheral European borrowers,” it added, referring to heavily indebted Greece, Portugal and Ireland.

It said some major European banks depend heavily on US money market funds for short-term dollar funding.

The same money market funds — mutual funds often comprising the savings of many individuals and businesses that invest in mostly debt securities — are lenders to the European repo market as well, the report said.

While the money market funds report minimal direct exposure to the three problematic countries, “amplification of a shock through these channels is still possible,” the report said.

It was the premier report from the council, created in the past year out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, aimed at preventing another systemic meltdown like that of 2007-2008.

In a briefing on the report, a Treasury official stressed that it was still hard to gauge the dangers in the European market.

“The difficulty is trying to understand contagion from Europe through financial markets, and some of the links that our major banks have with the major banks in Europe,” said the official.

© AFP — Published at Activist Post with license