U.S. Money Fund Exposure and European Banks: Eurozone Hits Fresh Low

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1 U.S. Money Fund Exposure and European Banks: Eurozone Hits Fresh Low Macro Credit Research July 26, 2012 Analysts Macro Credit Research Robert Grossman Kevin D Albert kevin.d albert@fitchratings.com Martin Hansen martin.hansen@fitchratings.com Fund and Asset Manager Group Viktoria Baklanova viktoria.baklanova@fitchratings.com Related Research U.S. Money Fund Exposure and European Banks: Disengagement Continues, June 22, 2012 Research Highlights Sample based on 10 largest U.S. prime MMFs with total exposure of $614 billion as of June 30, 2012, representing 44% of $1.39 trillion in total U.S. prime MMF assets. Geographic exposure to banks (% of total MMF assets): Europe: 24.2% (decreasing) Eurozone: 8.2% (decreasing) Japan: 11.8% (increasing) Largest exposures to individual banks (% of total MMF assets): Credit Suisse: 4.0% National Australia Bank: 3.7% Bank of America: 3.4% Total exposure to Treasurys and Agencies (direct holdings and through repos): 32.2%. Eurozone Drop Resumes: U.S. prime money market fund (MMF) exposures to eurozone banks fell by 33% since the prior reporting period and, as of end-june 2012, represent roughly 8% of total MMF assets in Fitch s sample, a record low during Fitch s period of study starting in end (See Eurozone Decline Resumes chart below.) Since end-may 2011, allocations to eurozone banks have dropped by almost 80% on a dollar basis. (See Change in Exposure [on a Dollar Basis] table.) This deepening disengagement stems both from ongoing MMF risk aversion to this sector as well as heightened caution by both some European banks and their regulators on the use of this potentially volatile form of funding. Aggregate MMF allocations to European banks outside of the eurozone declined moderately, with decreasing exposure to UK banks partially offset by increased allocations to Nordic banks. Outside of Europe, MMF exposures to Japanese banks continued to rise, with relative stability in MMF holdings of Canadian and Australian banks. Eurozone Decline Resumes Eurozone Europe (all) (% of Total MMF Assets Under Management) Source: Fitch Ratings, MMF public Web sites, and SEC filings. Change in Exposure (on a Dollar Basis) Australia, Canada, Japan Rest of Europe (% Change in MMF Exposure) Since End-May 2011 Since End-May 2012 Europe -62% -18% Eurozone -78% -33% France -88% -28% Germany -67% -26% Netherlands -64% -41% Nordic -28% 15% Switzerland -1% -2% UK -56% -23% Japan 99% 11% Australia -14% 1% Canada 21% -2% Treasuries (US) 79% 6% Agencies (U.S.) 18% 3%

2 MMF Risk Aversion Persists: Declining MMF allocations to eurozone banks are at least partly a reflection of ongoing investor concern about the region. Of MMF allocations to European banks, more than onethird is secured in the form of repos. (See the Repos Continue to Rise chart.) It is important to note that the quality of repo collateral can vary, as illustrated in Fitch s report, Repo Emerges from the Shadow, dated February In another ongoing sign of risk aversion, holdings of short-term U.S. Treasurys and agencies continue to exceed 20% of MMF assets. (See the Treasurys and Agencies (Including Repo) Reflect Ongoing Risk Aversion chart.) Additionally, almost 10% of MMF assets are in the form of repos collateralized by Treasurys and Agencies, meaning in effect that roughly one-third of prime MMF assets represent Treasury and Agency exposure, versus 20% as of end-may These sizable allocations to Treasurys and Agencies are particularly noteworthy in the current low-yield environment. For context, the median expense ratio for the 10 prime MMFs in Fitch s sample exceeds the median yield on their Treasury and Agency exposures. (See the Risk Aversion: MMF Expenses Exceed Yields on Treasury/Agency Exposure graph.) Repos Continue to Rise (Repos as % of Exposure to European Banks) Source: Fitch Ratings, MMF public Web sites, and SEC filings Risk Aversion: MMF Expenses exceed Yields on Treasury/Agency Exposure Median Coupon Median Expense Ratio (Net) Treasurys and Agencies (Including Repo) Reflect Ongoing Risk Aversion (% of Total MMF Assets Under Management) Treasurys and Agencies Treasury Agency (U.S.) Repos Collateralized by Treasurys and Agencies (U.S.) a Total (Direct Holding and Repo) b 2H H H H H H H H H / / / / / / / / / / / / / / / a For end-may 2012 and end-june 2012, some repos included as Treasury and Agency collateral are categorized as other in monthly statements and inferred from other data points. These will be verified once N-MFP data becomes publicly available for these periods. b Total is the sum of direct MMF holdings of Treasurys and Agencies and repos collateralized by Treasurys and Agencies. Largest MMF Exposures Financial Institutions (% of Total MMF Assets Under Management, As of End-June 2012) Issuer/Counterparty CD CP Repo Other Total Credit Suisse National Australia Bank Bank of America Bank of Nova Scotia Bank of Tokyo Mitsubishi Royal Bank of Canada JP Morgan Chase Mizuho Sumitomo Mitsui Banking Corp Citibank Barclays Toronto Dominion Bank Westpac Deutsche Bank Svenska Handelsbanken CD Certificate of deposit. CP Commercial paper. Repo Repurchase agreement. Note: European banks are bolded above. ABCP Asset-backed commercial paper Source: Fitch Ratings, MMF public Web sites, SEC filings 2 July 26, 2012

3 Fitch s sample represents 44% of the Investment Company Institute s estimate of approximately $1.39 trillion in total U.S. prime MMF assets under management. This study focuses on aggregate MMF exposure to banks CDs, CP, asset-backed CP, repos, and other shortterm notes and deposits. Largest Bank Exposures: The 15 largest exposures to individual banks, as a group, comprise approximately 43% of total MMF assets. (See the Largest MMF Exposures Financial Institutions table on page 2.) Deutsche Bank remains the only eurozone institution within the top 15, contrasted with three eurozone institutions in the top 15 at end-may 2012 and seven institutions at end-may Collectively, Australian, Canadian, and Japanese banks represent a majority of the top 15 names. There is considerable variety in the form of MMF exposure to these top 15 institutions. MMF exposures to banks that serve as primary dealers are often largely in the form of repos (e.g, Bank of America, Credit Suisse), with exposures to some other banks predominated by certificates of deposit (e.g, Bank of Nova Scotia, National Australia Bank, and Bank of Tokyo Mitsubishi). Reliance on MMF Funding: The Bank Reliance on MMF Funding table illustrates bank reliance on MMFs, expressed as the ratio of MMF exposure to a given institution (based on Fitch s sample of the 10 largest MMFs) as a percentage of that institution s total deposits, money market, and short-term funding. Of the top 15 MMF exposures to global banks, MMF funding accounts for at least 3% of short-term liabilities for five institutions. Bank Reliance on MMF Funding (%, As of End-June 2012) CD, CP, Repo, Other/Financial Institution s Issuer/Counterparty Short-Term Liabilities a Svenska Handelsbanken 7.5% National Australia Bank 4.6% Credit Suisse 4.0% Bank of Nova Scotia 3.9% Royal Bank of Canada 3.4% Westpac 2.7% Toronto Dominion 2.2% Bank of America 1.6% Citibank 1.4% Barclays 1.4% JP Morgan Chase 1.3% Bank of Tokyo Mitsubishi 1.3% Sumitomo Mitsui Banking Corp 1.2% Deutsche Bank 1.1% Mizuho 1.1% a Total deposits, money market, and short-term funding. Sample consists of top 15 largest MMF exposures to financial institutions. CD Certificate of deposit.cp Commercial paper. Repo Repurchase agreement. Note: European banks are bolded above. 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. At present, the report does not have any rating implications. For the most recent observation period (i.e. June 30, 2012), the MMFs in Fitch s sample represent roughly $614 billion, or 44%, of the Investment Company Institute s estimate of approximately $1.39 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 of each observation period. To identify the 10 largest funds that make up Fitch s sample, Fitch uses rankings of fund assets under management sourced from Crane Data LLC. Fitch sources all of the underlying fund exposure data directly from MMF public disclosures, not through a third party data source. 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, asset-backed CP, repos, and other notes (e.g. time deposits). Bank exposure data for foreign branches is consolidated within the banking group s home jurisdiction. Exposures to foreign subsidiaries are generally categorized based on the country classification designated by Fitch s financial institutions group. Bank exposure data includes state-controlled financial institutions, where applicable. 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. The period of observation covers nine distinct semiannual periods, month-end for February 2011, and month-end for May 2011 through June Note that prior to 2011, financial reporting dates often varied across MMFs. Therefore, Fitch has applied a degree of judgment in categorizing individual MMF filings into the appropriate semiannual bucket within its historical time series. 3 July 26, 2012

4 Appendix MMF Exposure to Bank CDs, CP, Repos, and Other By Country (As a % of Total MMF Assets Under Management) Europe BE FR DE IE IT NL Nordic PT ES CH U.K. (All) AU CA JP U.S. 2H CD CP Repo Other H CD CP Repo Other H CD CP Repo Other H CD CP Repo Other H CD CP Repo Other H CD CP Repo Other H CD CP Repo Other H CD CP Repo Other H CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other CD Certificates of deposit. Repo Repurchase agreement. BE Belgium. FR France. DE Germany. IE Ireland. IT Italy. NL Netherlands. PT Portugal. ES Spain. CH Switzerland. U.K. United Kingdom. AU Australia. CA Canada. JP Japan. U.S. United States. Continued on next page. 4 July 26, 2012

5 MMF Exposure to Bank CDs, CP, Repos, and Other By Country (Continued) (As a % of Total MMF Assets Under Management) Europe BE FR DE IE IT NL Nordic PT ES CH U.K. (All) AU CA JP U.S. 9/ CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other / CD CP Repo Other CD Certificates of deposit. Repo Repurchase agreement. BE Belgium. FR France. DE Germany. IE Ireland. IT Italy. NL Netherlands. PT Portugal. ES Spain. CH Switzerland. U.K. United Kingdom. AU Australia. CA Canada. JP Japan. U.S. United States. 5 July 26, 2012

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