U.S. Money Market Funds Adding Sizeable Quantities of European Bank Debt

Here's some news that will conjure up the possibility of a potential new round of bailouts of banks Too Big To Fail.

European banks are playing a dominant role in U.S. money-market fund portfolios -- even European debt fears haven't stemmed the appetite, reports MarketWatch.

The percentage of foreign bank obligations -- which are largely European, and include Eurodollar certificates of deposit, Yankeedollar CDs and bankers' acceptances -- in prime money-market funds rose to 11.5% as of July, up from 9.8% a year earlier and 7.9% in July 2008, according to research firm iMoneyNet.

Most significant, Lance Pan, director of investment research and author of the Capital Advisors study, said that one shift he's noticed as a result of the spring crisis was that funds were buying paper of shorter duration, and also investing less in smaller banks, according to MarketWatch.

"They used to buy [debt from] second- or third-tier banks, but now [most] exposure is to mega-banks," he said.

This shift to mega banks is obviously the result of MMF's realizing that these are the banks that are too big to fail. Thus, an unintended consequence of the willingness of governments to bail out mega banks is that it becomes easier for mega banks to obtain funding, at the expense of smaller bank. And further, this creates money flow to the big banks which makes them even bigger, and even less likely not to be bailed out.