U.S.

Money Fund Exposure to European Banks Remains Significant

Macro Credit Research
June 21, 2011

Analysts
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.

Figure 1: Exposure to Banks i n "Core" Countries Remai ns Elevated

(% of Total MMF Assets Under Management)
France 20 15 10 5 0 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 Feb-11 May-11 Sources: Fitch Ratings, MMF public Web sites, SEC filings. Germany Italy and Spain United Kingdom

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

(%)

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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U.S. Money Fund Exposure to European Banks Remains Significant

The other dimension of the relationship between banks and MMFs is MMFs as a source of short-term bank funding. Of the top 15 MMF exposures to global banks, MMF funding accounts for at least 3% of total deposits, money market, and short-term funding for seven institutions. This figure would be higher if including the full universe of prime MMFs beyond the ten largest funds, as well as other privately managed liquidity pools and European U.S. dollardenominated money funds with similar investment profiles. While the overall funding reliance on MMFs might not appear significant, the potential withdrawal of MMF funding could create negative perceptions about an institutions financial condition.

Figure 2: Largest MMF Exposures Financial Institutions

(% of Total MMF Assets Under Management, As of May 2011) Other (e.g. Notes) 0.0 0.0 0.0 0.0 0.4 0.8 0.6 0.0 0.6 0.0 0.0 0.6 0.0 0.0 0.0

Figure 3: Bank Reliance on MMF Funding

(As of May 2011) CD, CP, Repo, Other/ Financial Institution's Deposits and Short-Term Liabilities (%)a 6.7 6.2 5.7 4.2 3.8 3.8 3.3 2.9 2.6 2.5 2.3 2.2 1.9 1.5 1.3

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
a

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.

Drivers of U.S. MMF Exposure to European Banks

There are several macro factors which help explain the significant exposure of U.S. MMFs to European bank issuers. > European Banks Need for Dollar Funding: Dollar-denominated assets of European banks have grown rapidly over the past decade, from approximately $2 trillion in 1999 to more than $8 trillion in 2008. See March 2009 Bank for International Settlements Quarterly Review U.S. Dollar Money Market Funds and Non-U.S. Banks). U.S. prime money funds provide a natural source for short-term dollar financing. Narrowing Investment Opportunities for MMFs: During the financial crisis, industry consolidation and the failure of several financial institutions reduced the global universe of potential MMF investment targets, particularly in the U.S. (e.g. Bear Stearns, Countrywide, Lehman Brothers, Wachovia, and Washington Mutual). Additionally, since the beginning of 2007, ABCP outstanding has dropped from $1.2 trillion to $380 billion. Finally, short-term Treasury yields are hovering near 0%. European bank CD exposure has helped to fill the resulting void.

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June 21, 2011

Fitch Ratings

Background on Fitch Study

> > > This research study is intended to provide market participants with information on MMF exposures to European banks, and does not comment specifically on Fitch-rated MMFs. As such the report does not at present have any rating implications. For the most recent observation period (i.e. May 31, 2011), the MMFs in Fitchs sample represent roughly $755 billion, or 45% of the Investment Company Institutes estimate of approximately $1.66 trillion in total U.S. prime MMF assets under management. The sample set is based on public filings from the 10 largest prime institutional and retail MMFs, as measured by assets under management, as of each observation period. Thus, in some cases the MMFs sampled differ slightly from period to period. Because this analysis is based on aggregated data for the 10 MMFs sampled, it does not capture potential differences in exposure profiles across individual funds. MMF exposure to banks encompasses the following instrument types: CDs, CP, ABCP, repos, and corporate notes. Bank exposure data for foreign subsidiaries is generally consolidated within the banking groups home jurisdiction. Bank exposure data includes state-controlled financial institutions, where applicable. In order to maintain data integrity, Fitch periodically reviews raw exposure-level holdings data and, if warranted, may reclassify specific exposures (e.g. by asset type, industry sector, counterparty, or country). Reclassification and/or revisions to the dataset can result in generally minor changes to the historical time series of MMF exposures. Because of both the inclusion of new instrument types (e.g. time deposits and corporate notes) and exposure reclassifications, historical data in some instances changed slightly, relative to prior updates of this study. For example, Fitchs prior study (published in March 2011) provided a total European bank exposure figure of 44.3% for month-end February. In this current study, the corresponding historical figure for month-end February is 49.6%, a 5.3% increase accounted for by reclassifications (0.9%) and the inclusion of other instrument types (4.4%). The period of observation covers nine distinct semiannual periods, month-end February 2011, and month-end May 2011. Note that financial reporting dates often vary across MMFs. Fitch therefore has applied a degree of judgment in categorizing individual MMF filings into the appropriate semiannual bucket. Most of the historical data included in this study is comparable to a report published by Fitch in December 2010. (See U.S. Money Market Funds: Recent Trends in Exposure to European Banks.) However, second-half 2010 data in the December 2010 report was compiled as of October 2010, and reflects an interim observation for that period. The second-half 2010 data provided in this report has been updated and revised to reflect MMF holdings as of November/December 2010, resulting in slight differences with the second-half 2010 figures published in the December 2010 report.

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June 21, 2011

U.S. Money Fund Exposure to European Banks Remains Significant

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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