By Simon Miller

US prime money market fund (MMF) exposures to eurozone banks have hit a record low according to Fitch Ratings.

Research from the ratings agency found that US MMF exposure had declined 33% during June 2012 representing approximately 8% of total MMF assets, a record low since 2006.

Aggregate MMF allocations to the rest of Europe declined moderately with decreasing exposure to UK banks partially offset by increased allocations to Nordic banks.

Outside of Europe, MMF exposures to Japanese banks doubled since May 2011 and are at their highest level, at almost 12% of total fund assets, over Fitch's study period. Holdings of Canadian and Australian banks remained relatively steady.

'Money fund disengagement stems from both ongoing risk aversion and heightened caution by some European banks and their regulators on using this potentially volatile form of funding,' said Robert Grossman, managing director, Fitch Macro Credit Research.

The 15 largest exposures to individual banks collectively represent approximately 43% of total MMF assets. Consistent with Fitch's findings, only one eurozone institution remained within the top 15, compared with three eurozone banks at end-May 2012 and seven at end-May 2011.

Holdings of short-term US Treasuries and agencies continue to exceed 20% of MMF assets, another sign of risk aversion. Additionally, almost 10% of MMF assets are in the form of repos collateralised by Treasurys and Agencies, meaning in effect that roughly one-third of prime MMF assets within Fitch's sample represent Treasury and Agency exposure, versus 20% as of end May 2011.

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