European bank money is heading home as the sovereign debt crisis reaches a crescendo

European bank money is heading home as the sovereign debt crisis reaches a crescendo, insulating the euro exchange rate but threatening a credit shock to challenge policymakers worldwide.

To the extent this is being caused by a deleveraging of euro zone banks facing both dollar funding strains and regulatory pressure to build capital, the repatriation helps explain why the single currency has not been hit by European "dollar shortages" as it was after Lehman Brothers' bust in 2008.

Data on the euro zone's balance of payments released Monday offered support to anecdotal evidence that a repatriation of European money is underway via bank asset sales.

The European Central Bank numbers showed net portfolio investment flows into the euro zone -- essentially movements of stock and bond holdings -- rose for the second month in a row in September, clocking 20.7 billion euros (18 billion pounds) during the month after an inflow of 31.9 billion euros in August.

What is remarkable is how robust the inward investment numbers continue to look despite the bloc's rising financial stress, fears for the single currency and a looming austerity-driven recession.

Cumulative net portfolio inflows to the euro's 17 member countries in the 12 months to September were a whopping 335 billion euros -- more than 300 billion euros higher than the previous 12 months. And only two of the first nine months of 2011 -- January and July -- showed net outflows.

What makes the net inflow all the more significant is that it comes against ample evidence that overseas investors have been exiting euro zone securities.

U.S. mutual fund data tracked by EPFR, for example, shows 10 straight weeks of outflows from European bond funds to mid-November. Bank of America Merrill Lynch's monthly funds survey also shows managers with heavy underweight positions in euro equity while overweight U.S. and emerging market stocks.

What at first appears a puzzling new-found enthusiasm for euro financial assets is more likely to be the product of pressure on the region's banks.