Non-US banks' cash plunged almost 40 percent, or $420 billion, in the five months before Nov 30, according to Federal Reserve data tracked by Barclays PLC. Jason Alden / Bloomberg

Lenders 'importing' dollars from Europe to sustain overseas branches

NEW YORK - US branches of foreign banks, struggling to tap US markets for short-term funding amid the European debt crisis, are using up their cash at the fastest pace since at least 2006 and seeking infusions of dollars from their home countries.

Non-US banks' cash plunged almost 40 percent, or $420 billion, in the five months before Nov 30, leading to an 18 percent decline in assets, according to Federal Reserve data tracked by Barclays PLC.

The Fed's swap lines to foreign central banks, used to make dollars available abroad, surged last week after six central banks lowered the cost of obtaining US dollars on Nov 30.

"There has been a dramatic melting away since the end of June of non-US banks cash holdings," said Joseph Abate, a strategist at Barclays Capital. "As financing conditions have tightened and come under stress, foreign banks' US branches have switched from exporting dollars back to their headquarters to effectively importing them."

Banks are losing access to US funding as European leaders fail to convince investors they can contain a crisis that led to bailouts of Greece, Ireland and Portugal and now threatens Italy and Spain. French banks lost almost 50 percent of their financing from money-market funds in the five-month period ended Nov 30, Barclays said.

Short-term lending strains are persisting even as European policymakers agreed to a fifth comprehensive plan on Dec 9 to end the crisis.

The deal included a blueprint for establishing a closer fiscal union and an increase of their rescue fund for debt-laden nations by 200 billion euros ($261 billion).

Cash held by foreign banks in the United States has plunged from more than $1 trillion at the end of June, Barclays Capital's Abate said in a research note last week.

The drop in the lenders' cash cushions means that their half-life, or amount of time it would take for the funds to be cut in half, is likely five months or less, the analyst said.

Money funds flee

US money-market mutual funds, typically among the biggest buyers of commercial paper, the short-term IOUs banks sell to finance themselves, are reducing holdings of European bank debt.

The eight largest prime US money-market mutual funds cut their stakes in debt of French banks by 68 percent in November, shifting investments to Swiss, Swedish, Canadian and Japanese lenders. French bank holdings plunged 93 percent to $5.56 billion the past 12 months.

Foreign financial institutions' commercial paper fell $3.6 billion to $164.5 billion outstanding in the week ended Dec 14, the lowest level in more than two years, the Fed said last week. Overall, the seasonally adjusted amount of US commercial paper outstanding dropped by $5.6 billion to $991.7 billion in the week, the biggest decline since the period ending Nov 9.

"I don't think that that money is going to come back until US investors feel that Europe is politically on more stable ground and the negative headlines go away," said Alex Roever, head of short-term fixed-income strategy at JPMorgan. "That could be a while."

Refinancing operation

The decline in short-term lending has forced European banks to increase borrowings from the European Central Bank (ECB) and to boost their use of cross-currency swaps to obtain dollar funding.

The ECB's weekly main refinancing operation, where it lends to banks, jumped 16 percent to 292 billion euros in the latest period, the largest amount since June 2009, according to Tony Crescenzi, a strategist and money manager at Pacific Investment Management Co, which runs the world's biggest bond fund.

The central bank said on Dec 8 that it will offer the region's banks unlimited cash for as long as three years, and it loosened collateral rules for loans. The ECB has been lending its banks as much money as they need on an overnight basis this year in its regular refinancing operations.

Fed swap lines

"The European banks that did borrow from the US markets have been able to replace nearly all of their funding that they've lost either through liquidating assets or more likely through borrowing from the (ECB)," Roever said.

Fed swap lines to foreign central banks surged $52 billion to $54.3 billion last week after it teamed up with five other central banks on Nov 30 to lower borrowing costs by 0.5 percentage point in a coordinated action.

The Fed lends dollars through the swaps to other central banks, which auction them to local lenders and give the Fed foreign currency as collateral.

Foreign banks' US branches are drawing dollars from home for the first time. US divisions are getting $200 billion from parent companies, up from none in June, said Pimco's Crescenzi. The amount peaked at $289 billion three weeks ago, he said.

"Never in 40 years of Federal Reserve data had US-based branches of foreign banks owed dollars to their parent company until now," Crescenzi said last week.

Bloomberg News