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Macro Credit Research Robert J. Grossman +1 212 908-0535 robert.grossman@fitchratings.com Kevin DAlbert +1 212 908-0823 kevin.dalbert@fitchratings.com Martin Hansen +1 212 908-9190 martin.hansen@fitchratings.com Fund and Asset Manager Group Viktoria Baklanova +1 212 908-9162 viktoria.baklanova@fitchratings.com
Summary
U.S. prime money market funds (MMFs) continue to have sizable exposures to European financial institutions, a relationship which could affect both sectors. MMFs are a potential channel for eurozone credit market volatility. For European banks, a loss or reduction in MMF funding could create negative perceptions about an institutions financial strength. This report analyzes MMF portfolio trends through May 31, 2011, and updates Fitch Ratings prior study, which was based on results from the end of February. Fitchs analysis is based on a sample of the 10 largest prime MMFs, representing 45% of the total prime fund universe, and focuses on their aggregate exposure to banks certificates of deposit (CDs), commercial paper (CP), asset-backed CP (ABCP), repurchase agreements (repos), and other short-term notes and deposits.
Related Research
U.S. Money Fund Exposure to European Banks: Recent Developments, March 30, 2011 U.S. Money Market Funds: Recent Trends in Exposure to European Banks, Dec. 10, 2010
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Research Highlights
Sample based on 10 largest U.S. prime MMFs, currently representing $755 billion (i.e. 45%) of $1.66 trillion in total U.S. prime MMF assets. Recent bank exposure trends (% of total MMF assets) Figure 1: Europe: 50.2% (stable) France: 14.8% (increasing) Italy: 0.8% (declining) MMF exposures to individual banks (% total MMF assets) Figure 2: 1. Deutsche Bank: 4.5% 2. BNP Paribas: 4.1% 3. Rabobank: 3.8% Banks use of MMF funding (% of institutions deposits and shortterm liabilities) Figure 3: 4. Rabobank: 6.7% 5. Westpac: 6.2% 6. Natixis: 5.7%
Over the past three months, MMF exposure to European banks has been stable, at roughly 50% of total MMF assets, inclusive of time deposits and notes (see note on page 3). Aggregate exposure to French, German, and U.K. banks remained constant at 30% of total MMF assets, although there was some variation in trends across countries. German bank exposure decreased from 8.2% to 6.3% of MMF assets, while French bank exposure rose from 13.3% to 14.8% over the same period. U.K. bank exposure also increased, from 8.6% to 9.7% of MMF assets (see Figure 1). Since peaking in 2009, MMF exposures to Italian and Spanish banks have continued to decline steadily. Italian bank exposure roughly halved since February, falling from 1.5% to 0.8% of total MMF assets. Spanish banks remained steady at 0.2% of total assets, as MMFs had already reduced this exposure significantly in 2010. The 15 largest global bank exposures, as a group, comprise more than 40% of total MMF assets (see Figure 2). Of the top 15, there are 10 European institutions that in aggregate account for more than 30% of total MMF assets. The four French banks among the top 15 (BNP Paribas, Credit Agricole, Societe Generale, and Natixis) represent roughly 12% of total MMF assets.
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Issuer/Counterparty Total 4.5 4.1 3.8 3.0 3.0 3.0 3.0 2.9 2.5 2.4 2.4 2.3 2.3 2.1 2.0 Rabobank Westpac Natixis National Australia Bank Deutsche Bank Bank of Nova Scotia Royal Bank of Canada Societe Generale BNP Paribas ING UBS Barclays Credit Agricole Royal Bank of Scotland JP Morgan Chase
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Issuer/Counterparty Deutsche Bank BNP Paribas Rabobank Barclays Credit Agricole Westpac Societe Generale ING Royal Bank of Canada Bank of Nova Scotia Royal Bank of Scotland JP Morgan Chase National Australia Bank Natixis UBS
CD 2.1 3.2 3.1 0.8 2.4 0.5 1.2 2.0 1.4 2.3 1.4 0.0 2.3 1.2 1.3
CP 0.3 0.2 0.7 0.3 0.1 1.7 0.9 0.5 0.4 0.1 0.1 0.3 0.0 0.8 0.0
Repo 2.2 0.6 0.0 1.9 0.1 0.0 0.3 0.4 0.1 0.0 0.9 1.4 0.0 0.0 0.7
Note: Totals may vary due to rounding. European banks are bolded above. Source: Fitch Ratings, MMF public Web sites, SEC filings.
Total deposits, money market, and short-term funding. Note: European banks are bolded above. Source: Fitch Ratings, MMF public Web sites, SEC filings.
A Regulatory Conundrum
Systemic interconnectedness complicates the many challenges that regulators face in their efforts to enhance the safety and stability of the post-crisis financial sector. For example, new Basel III liquidity ratios create incentives for banks to reduce their reliance on shortterm liabilities by assuming that unsecured funding of less than 30 days runs off completely in a stress scenario. Efforts by banking regulators to lengthen the duration of banks liabilities create an apparent tension with securities regulators objectives to reduce the maturity profile of MMFs investment portfolios. More specifically, Rule 2a-7 revisions reduce the average maturity of MMF investments from 90 days to 60 days and introduce minimum daily and weekly liquidity requirements, creating disincentives for MMFs to invest in longer-dated bank CD and CP issuance.
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Figure 4: MMF Exposure to Bank CDs, CP, Repos, and Other By Country
(As a % of Total MMF Assets Under Management)
BE FR DE IE IT NL Nordic PT ES CH UK Europe (All) AT CA JP US 2H06 1.4 10.0 10.1 0.4 2.4 4.1 2.6 0.0 0.7 4.0 12.8 48.7 1.6 3.0 2.7 24.6 CD 0.5 6.2 3.4 0.3 0.9 1.0 0.9 0.0 0.1 1.7 5.5 20.4 0.1 2.2 2.6 1.3 CP 0.8 1.4 3.4 0.2 0.3 2.6 1.1 0.0 0.3 0.5 3.3 14.1 1.1 0.4 0.0 7.7 Repo 0.0 0.1 1.2 0.0 0.0 0.0 0.0 0.0 0.0 1.3 1.2 3.8 0.0 0.0 0.0 5.8 Other 0.1 2.4 2.0 0.0 1.2 0.4 0.6 0.0 0.3 0.5 2.8 10.4 0.4 0.3 0.1 9.7 1H07 2.1 10.4 9.8 0.4 1.9 4.3 2.9 0.0 0.9 4.6 13.0 50.5 2.1 3.0 2.3 26.6 CD 1.0 6.1 3.6 0.2 0.5 1.7 0.7 0.0 0.2 2.8 5.1 22.0 0.4 2.2 2.0 1.4 CP 0.7 1.1 2.5 0.1 0.2 2.0 1.2 0.0 0.1 1.1 3.1 12.2 1.2 0.3 0.1 7.4 Repo 0.0 0.1 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.6 1.8 3.7 0.0 0.0 0.0 8.2 Other 0.4 3.0 2.4 0.1 1.2 0.6 1.0 0.0 0.6 0.1 3.1 12.5 0.5 0.6 0.2 9.6 2H07 2.5 8.6 8.4 0.8 1.7 4.8 3.3 0.1 1.9 4.9 13.4 50.5 2.0 3.7 1.8 26.7 CD 1.2 4.8 2.1 0.3 0.4 1.3 1.4 0.0 1.0 2.5 6.2 21.2 0.3 2.5 1.6 2.1 CP 1.2 1.3 1.9 0.4 0.3 2.9 1.3 0.1 0.3 0.6 4.2 14.3 1.0 0.5 0.1 9.2 Repo 0.0 0.4 2.7 0.0 0.0 0.0 0.0 0.0 0.0 1.7 1.0 5.8 0.0 0.0 0.0 8.0 Other 0.1 2.1 1.7 0.1 1.0 0.7 0.7 0.0 0.6 0.1 2.0 9.2 0.7 0.7 0.0 7.3 1H08 2.6 10.2 7.1 1.6 3.2 3.8 3.7 0.0 2.6 3.4 11.0 49.3 4.0 2.9 1.2 18.6 CD 1.1 6.9 2.1 0.8 1.9 1.5 0.9 0.0 2.1 1.4 5.7 24.4 1.0 1.8 1.0 1.3 CP 1.0 1.2 1.1 0.7 0.4 1.6 1.5 0.0 0.1 0.4 2.6 10.8 1.6 0.3 0.1 6.7 Repo 0.0 0.2 2.9 0.0 0.0 0.0 0.0 0.0 0.0 1.2 0.9 5.2 0.0 0.1 0.0 4.5 Other 0.5 1.9 1.0 0.1 0.9 0.6 1.3 0.0 0.4 0.4 1.6 8.9 1.4 0.7 0.1 6.1 2H08 0.5 12.7 3.5 0.5 2.7 5.1 3.7 0.0 3.3 2.9 10.4 45.4 4.2 6.2 0.9 15.8 CD 0.1 7.7 0.9 0.4 2.3 2.5 1.3 0.0 2.6 1.2 5.5 24.5 1.9 4.2 0.5 1.6 CP 0.2 2.1 0.9 0.1 0.4 2.2 1.6 0.0 0.6 0.6 2.9 11.7 1.1 1.0 0.2 7.8 Repo 0.0 0.6 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.8 1.1 3.0 0.0 0.2 0.0 2.3 Other 0.2 2.4 1.1 0.0 0.0 0.4 0.7 0.0 0.1 0.3 0.9 6.2 1.2 0.9 0.1 4.0 1H09 1.0 16.2 4.9 0.1 3.0 5.3 4.7 0.5 3.2 2.4 10.9 52.3 4.0 5.9 3.5 8.4 CD 0.6 11.4 2.2 0.0 2.4 3.7 2.1 0.5 2.1 1.2 6.2 32.4 1.8 4.8 3.4 1.5 CP 0.0 2.1 1.0 0.0 0.6 1.3 1.7 0.0 0.9 0.5 2.0 10.2 1.3 0.4 0.1 3.8 Repo 0.0 0.8 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.3 1.7 4.0 0.0 0.2 0.0 2.0 Other 0.4 1.9 0.6 0.0 0.0 0.3 0.9 0.0 0.2 0.3 1.0 5.6 0.9 0.5 0.0 1.0 2H09 1.8 16.4 6.0 0.4 3.2 6.1 5.3 0.3 2.9 1.5 11.2 55.2 6.2 6.0 4.7 9.2 CD 1.0 11.7 2.7 0.4 2.4 4.8 3.1 0.2 2.0 0.6 6.8 35.8 3.0 5.0 4.5 0.6 CP 0.3 2.7 1.7 0.0 0.8 0.8 1.4 0.1 0.9 0.2 1.3 10.2 2.2 0.6 0.1 2.0 Repo 0.0 0.3 1.2 0.0 0.0 0.1 0.0 0.0 0.0 0.5 2.6 4.8 0.0 0.1 0.0 4.6 Other 0.5 1.8 0.4 0.0 0.0 0.3 0.8 0.0 0.0 0.1 0.5 4.4 1.0 0.4 0.0 2.0 1H10 1.3 12.7 7.8 0.0 1.9 5.7 5.8 0.0 1.8 1.7 9.8 48.5 6.1 6.9 4.0 9.8 CD 0.7 9.1 2.3 0.0 1.0 4.1 2.5 0.0 1.2 0.4 5.8 27.1 2.3 5.4 3.7 0.9 CP 0.3 1.7 2.3 0.0 0.9 1.0 1.9 0.0 0.5 0.5 1.1 10.3 2.3 0.2 0.3 1.9 Repo 0.0 0.3 2.0 0.0 0.0 0.2 0.0 0.0 0.0 0.8 2.5 5.9 0.0 0.5 0.0 5.0 Other 0.3 1.6 1.2 0.0 0.0 0.3 1.4 0.0 0.1 0.0 0.3 5.2 1.5 0.9 0.0 2.0 2H10 1.2 14.5 7.8 0.0 1.3 6.2 5.0 0.0 0.6 3.1 9.8 49.6 7.2 7.6 5.5 9.4 CD 0.5 10.4 2.4 0.0 0.4 4.4 3.2 0.0 0.3 1.4 4.5 27.5 3.5 5.8 5.3 0.5 CP 0.3 2.2 2.1 0.0 0.9 1.1 1.6 0.0 0.2 0.3 1.9 10.7 2.6 0.4 0.2 1.2 Repo 0.0 0.6 2.5 0.0 0.0 05. 0.0 0.0 0.0 1.1 2.9 7.7 0.0 0.2 0.0 5.0 Other 0.3 1.4 0.9 0.0 0.0 0.1 0.2 0.0 0.1 0.3 0.5 3.7 1.0 1.1 0.0 2.6 Feb-11 1.0 13.3 8.2 0.0 1.5 6.3 5.9 0.0 0.2 4.2 8.6 49.6 7.0 8.0 4.9 8.0 CD 0.3 8.3 2.8 0.0 0.1 4.4 2.9 0.0 0.1 2.0 3.7 24.7 2.9 6.0 4.6 0.4 CP 0.2 2.9 2.0 0.0 1.2 1.3 1.8 0.0 0.1 0.8 1.7 12.0 3.2 0.5 0.2 1.4 Repo 0.0 0.9 2.7 0.0 0.0 0.5 0.0 0.0 0.0 1.2 3.2 8.5 0.0 0.2 0.1 4.0 Other 0.4 1.2 0.7 0.0 0.3 0.1 1.1 0.0 0.0 0.3 0.1 4.4 0.9 1.3 0.0 2.2 May-11 0.6 14.8 6.3 0.0 0.8 7.2 6.2 0.0 0.2 3.9 9.7 50.2 7.7 8.2 4.8 7.5 CD 0.2 9.2 2.4 0.0 0.1 5.2 3.5 0.0 0.1 2.1 5.3 28.3 3.5 6.9 4.6 0.1 CP 0.1 3.7 1.2 0.0 0.6 1.5 1.9 0.0 0.0 0.4 1.3 10.7 3.2 0.5 0.0 1.1 Repo 0.0 1.0 2.2 0.0 0.0 0.4 0.1 0.0 0.0 1.4 3.1 8.2 0.0 0.2 0.2 4.4 Other 0.3 0.9 0.5 0.0 0.1 0.0 0.8 0.0 0.0 0.0 0.1 3.0 1.0 0.7 0.0 2.0 BE Belgium. FR France. DE Germany. IE Ireland. IT Italy. NL Netherlands. PT Portugal. ES Spain. CH Switzerland. UK United Kingdom. AT Australia. CA Canada. JP Japan. US United States. Source: Fitch Ratings, MMF public Web sites, and SEC filings.
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