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In the U.S., a dangerous affection for Canada


U.S. money market funds have a new crush: Canadian and Japanese lenders. It's hard to blame the funds for seeking safer harbours after their fast and furious exit from the euro zone. Yet, the new targets of their affection need to remember not to become too reliant on this fair-weather funding source.

The latest survey from Fitch Ratings found U.S. money market exposures to Canadian and Japanese banks in May increased to more than 22 per cent of the $638-billion (U.S.) of assets under management. A year ago, they represented just 13 per cent, and in 2008, less than 5 per cent. Canada's Bank of Nova Scotia and National Australia Bank made Fitch's top three list of banks that drink deepest from the money market pool. In 2010, France's BNP Paribas and Credit Agricole topped the bill, while U.S. behemoths Citigroup and JPMorgan led the rankings in 2007.

Such funding is welcome at a time when dollars are in short supply, but as American and French banks have already found out, money market investors are quick to run at the first sign of trouble. In just one year, they cut their euro zone exposure by 67 per cent - an exit so abrupt that the Federal Reserve had to step in to make sure Europe's banking system had sufficient dollars to function.

Don't forget that U.S. Securities and Exchange Commission chairwoman Mary Schapiro is on a mission to make money markets safer.

Proposed reforms, such as allowing net asset valuations to float rather than fixing them at $1, or mandating bigger capital cushions, would do that. But such an industry overhaul would also make investors less prone to park their hard-earned cash there. That, in turn, would leave money market funds with fewer dollars to lend abroad.

In the long run, a cooling of what is essentially hot money would bring greater stability to global finance. But it could still be a rude awakening for any bank that grows too comfortable, and reliant, on money markets.

© 2007 The Globe and Mail. All rights reserved.

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