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U.S. Money Fund Exposure to European Banks: Recent Developments Macro Credit Research March 30, 2011 Analysts Summary Macro Credit Research Robert Grossman +1 212 908-0535 [email protected] Market sentiment on European sovereigns that have experienced heightened investor concern continues to affect the perceived credit risk of financial institutions in those countries. An important funding channel for European financial institutions and, therefore, a potential channel for eurozone sovereign risk, is U.S. prime money market funds (MMFs), which continue to have sizable exposures to European financial institutions (see text box on page 2). This report updates Fitch Ratings’ prior research on this topic (see December 2010 study, “U.S. Money Market Funds: Recent Trends in Exposure to European Banks”) as of end-February 2011 and focuses on MMF exposures to banks’ certificates of deposit (CDs), commercial paper (CP), asset-backed CP (ABCP), and, new for this report, repurchase agreements (repos). Kevin D’Albert +1 212 908-0823 kevin.d’[email protected] Martin Hansen +1 212 908-9190 [email protected] Fund and Asset Manager Group Viktoria Baklanova +1 212 908-9162 [email protected] MMF Exposure to European Bank CDs, CP, and Repurchase Agreements — By Select Country (As a % of Total MMF Assets Under Management) Related Research 16.0 14.0 ••U.S. Money Market Funds: Recent Trends in Exposure to European Banks, Dec. 10, 2010 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Research Highlights • Sample based on 10 largest U.S. prime MMFs, currently representing $736 billion (45%) of $1.63 trillion in total U.S. prime MMF assets. • Recent bank exposure trends (% of total MMF assets): oo Spain: 0.2% (declining) oo Italy: 1.3% (stable) oo France: 12.4% (stable) • Top MMF repo counterparties (% total MMF assets): oo Deutsche Bank: 2.8% oo Barclays: 1.9% oo J.P. Morgan Chase: 1.4% • Aggregate CD, CP, and repo exposure to Deutsche Bank: 4.9% of total MMF assets. (%) Europe CD, CP, and Repo (Right Axis) CP Repo Europe CD and CP (Right Axis) (%) 60 50 40 30 20 10 France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain France U.K. Italy Spain ••U.S. Money Market Funds Quarterly: Fourth-Quarter 2010, Jan. 11, 2011 CD 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 0 2/11 Fitch Ratings, MMF public Web sites, and SEC filings. >> MMF exposure to Spanish banks has declined significantly from peaks of roughly 3.0% of total MMF assets in 2008 and 2009 to just less than 0.2% as of February 2011 (see chart above). This exposure was 1.7% as recently as 1H 2010. >> MMF exposure to Italian banks, which until recently has followed roughly similar patterns as Spanish banks, has not experienced the same sharp decline. For example, Italian banks represented approximately 1.3% of MMF total exposures in both 2H 2010 and as of February 2011. >> MMFs continue to have immaterial exposure to Portuguese and Irish banks after peaking in 1H 2009 (0.5% of total MMF assets) and 1H 2008 (1.5% of total MMF assets), respectively. >> MMF exposure across all European banks (including CD, CP, ABCP, and repos) remains significant at 44.3% of total MMF assets as of February 2011. This is down slightly from www.fitchratings.com U.S. Money Fund Exposure to European Banks: Recent Developments Largest Global CD and CP Exposures Second-Half 2007 As of February 2011 CD & CP/ Counterparty Citibank % of Total MMF Assets CD & CD CP CP 0.3 3.3 3.6 Financial Institution’s Total Assets (%) 1.1 CD & CP/ % of Total MMF Assets Counterparty Rabobank CD 2.8 CP 0.6 CD & CP 3.4 Financial Institution’s Total Assets (%) 2.7 Barclays 2.5 0.9 3.4 0.9 BNP Paribas 2.9 0.3 3.2 0.9 JP Morgan Chase 0.4 2.2 2.7 1.2 Societe Generale 1.0 1.4 2.4 1.2 HBOS 0.8 1.1 1.9 1.0 Credit Agricole 2.2 0.1 2.3 0.7 Societe Generale 1.3 0.7 1.9 0.8 Westpac 0.4 1.7 2.2 2.6 Bank of America 0.1 1.8 1.9 0.7 National Australia Bank 2.1 0.0 2.1 2.2 ABN AMRO Bank 0.3 1.5 1.9 0.8 Deutsche Bank 1.4 0.6 2.1 0.6 UBS 1.2 0.5 1.7 0.6 Bank of Tokyo-Mitsubishi 2.0 0.0 2.0 0.8 Royal Bank of Scotland 1.0 0.5 1.5 0.5 Bank of Nova Scotia 1.7 0.2 2.0 2.8 Rabobank 0.5 1.0 1.5 1.2 ING 1.5 0.5 2.0 1.1 Source: Fitch Ratings, MMF public Web sites, and SEC filings. 2H 2010 of 45.9% (or approximately 40% if excluding repos). The largest European exposures are to banks in France (12.4% of total MMF assets) and the U.K. (8.6%). >> >> The 10 largest global bank exposures (CD and CP) have changed significantly relative to 2H 2007 (see table above), with only two of the 10 largest exposures (Societe Generale and Rabobank) remaining in the top 10 as of February 2011. This change in composition partly reflects a shift in asset type, since several of the largest exposures as of 2H 2007 were to institutions that were active sponsors of ABCP programs, an asset class that has declined markedly over this period. There has also been a notable change in the largest global MMF repo counterparties (see table below) from 2H 2007 to February 2011. In particular, several of the top 15 repo counterparties as of 2H 2007 experienced significant financial Largest Global Repo Counterparty Exposures Second-Half 2007 Counterparty As of February 2011 % of Total MMF Assets Counterparty % of Total MMF Assets Deutsche Bank 2.6 Deutsche Bank 2.8 Goldman Sachs 2.6 Barclays 1.9 Citibank 1.0 JP Morgan Chase 1.4 UBS 1.0 Royal Bank of Scotland 1.1 Merrill Lynch 1.0 Credit Suisse 1.0 Bank of America 0.9 Merrill Lynch 1.0 Morgan Stanley 0.7 ING 0.5 Credit Suisse 0.7 Citibank 0.4 Barclays 0.7 BNP Paribas 0.4 Lehman Brothers 0.6 Goldman Sachs 0.4 Bear Stearns 0.5 Wells Fargo 0.3 Wachovia 0.4 Societe Generale 0.3 JP Morgan Chase 0.4 Bank of America 0.3 BNP Paribas 0.4 Morgan Stanley 0.2 Royal Bank of Scotland 0.3 HSBC Total Europe Only (Bolded) 12.3 5.6 8.3 Source: Fitch Ratings, MMF public Web sites, and SEC filings. 2 0.2 13.6 difficulties, with some no longer existing as independent entities (e.g., Bear Stearns, Lehman Brothers, and Wachovia). >> Aggregate CD, CP, and repo exposure to Deutsche Bank composed almost 5% of total MMF assets as of February 2011. Drivers of U.S. MMF Exposure to European Banks There are several macro factors that help to explain the significant exposure of U.S. MMFs to European bank issuers. • Need for Dollar Funding: The dollar-denominated assets of European banks have grown rapidly over the past decade. Dollar-based European bank assets rose from approximately $2 trillion in 1999 to more than $8 trillion in 2008 according to the Bank for International Settlements (BIS) (see March 2009 BIS Quarterly Review article, “U.S. Dollar Money Market funds and Non-U.S. Banks”). U.S. money funds provide a natural source for short-term dollar financing (e.g., prime money fund total assets are approximately $1.63 trillion as of March 2011). • Financial Industry Consolidation: Industry consolidation and the failure of several financial institutions during the financial crisis have reduced the global universe of potential MMF investment targets, particularly in the U.S. For example, from the 1H 2007 through the beginning of 2011, the total number of financial institutions within this study’s sample of MMFs dropped by approximately 20% (e.g., Bear Stearns, Countrywide, Lehman Brothers, Wachovia, and Washington Mutual). This consolidation resulted in relatively more European institutions represented in the MMF investment mix. • Shrinkage of the ABCP Market: Since the beginning of 2007, ABCP outstanding has dropped from $1.2 trillion to $390 billion currently, in part reflecting diminished MMF appetite for this asset class. European bank CD exposure has helped to fill the resulting void. March 30, 2011 Fitch Ratings Background on Fitch Study • This research study is intended to provide market participants • The period of observation covers nine distinct, semiannual with information on MMF exposures to European banks and periods and month-end February 2011. Notably, financial does not comment specifically on Fitch-rated MMFs. As such, reporting dates often vary across MMFs. Fitch therefore has the report does not at present have any rating implications. applied a degree of judgment in categorizing individual MMF filings into the appropriate semiannual bucket. • The MMFs in Fitch’s sample for the most recent observation period (i.e., February 2011) represent roughly $736 billon, • Most of the historical data included in this study is comparable to the “U.S. Money Market Funds: Recent Trends in Exposure to or 45%, of the Investment Company Institute’s estimate of European Banks” report published by Fitch in December 2010. approximately $1.63 trillion in total U.S. prime MMF assets under management. However, 2H 2010 data in the December 2010 report was compiled as of October 2010 and reflects an interim observation • The sample set is based on public filings from the 10 largest for that period. The 2H 2010 data provided in this report has been prime institutional and retail MMFs (as measured by assets updated and revised to reflect MMF holdings as of November/ under management) as of each observation period. Thus, the December 2010, resulting in slight differences with the MMFs sampled differ slightly from period to period in some 2H 2010 figures published in the Fitch report. cases. This analysis is based on aggregated data for the 10 MMFs sampled and, therefore, does not capture potential • In order to maintain data integrity, Fitch periodically reviews differences in exposure profiles across individual funds. raw exposure-level holdings data and, if warranted, may reclassify specific exposures (e.g., by asset type, industry • MMF exposure to banks encompasses the following instrument sector, counterparty, or country). Reclassification and/or types: CDs, CP, ABCP, and repos. Corporate notes, including revisions to the data set can result in (generally minor) changes puttable notes, are beyond the scope of this analysis. Exposure to the historical time series of MMF exposures. data for foreign subsidiaries is consolidated within the banking group’s home jurisdiction. March 30, 2011 3 U.S. Money Fund Exposure to European Banks: Recent Developments Appendix MMF Exposure to Bank CDs, CP, and Repos — By Country (As a % of Total MMF Assets Under Management) AU BE DK FR DE IE IT LU NL NO PT ES SE CH U.K. Europe (All) 2H 2006 0.2 1.3 0.5 7.7 8.1 0.4 1.2 0.0 3.6 0.1 0.0 0.4 1.4 3.5 10.0 38.4 CD 0.0 0.5 0.0 6.2 3.4 0.3 0.9 0.0 1.0 0.0 0.0 0.1 0.9 1.7 5.5 20.4 14.1 CP 0.2 0.8 0.5 1.4 3.4 0.2 0.3 0.0 2.6 0.1 0.0 0.3 0.5 0.5 3.3 Repo 0.0 0.0 0.0 0.1 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.3 1.2 3.8 1H 2007 0.2 1.7 0.5 7.4 7.4 0.3 0.7 0.0 3.7 0.1 0.0 0.3 1.3 4.5 9.9 38.0 CD 0.1 1.0 0.0 6.1 3.6 0.2 0.5 0.0 1.7 0.0 0.0 0.2 0.7 2.8 5.1 22.1 CP 0.1 0.7 0.5 1.1 2.5 0.1 0.2 0.0 2.0 0.1 0.0 0.1 0.6 1.1 3.1 12.2 Repo 0.0 0.0 0.0 0.1 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 1.8 3.7 2H 2007 0.1 2.4 0.4 6.5 6.7 0.6 0.7 0.0 4.2 0.2 0.1 1.3 2.0 4.8 11.4 41.3 CD 0.0 1.2 0.0 4.8 2.1 0.3 0.4 0.0 1.3 0.0 0.0 1.0 1.3 2.5 6.2 21.2 CP 0.1 1.2 0.4 1.3 1.9 0.4 0.3 0.0 2.9 0.2 0.1 0.3 0.7 0.6 4.2 14.3 Repo 0.0 0.0 0.0 0.4 2.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.7 1.0 5.8 1H 2008 0.1 2.1 0.5 8.3 6.1 1.5 2.3 0.0 3.2 0.2 0.0 2.2 1.7 3.0 9.3 40.4 CD 0.0 1.1 0.0 6.9 2.1 0.8 1.9 0.0 1.5 0.0 0.0 2.1 0.8 1.4 5.8 24.4 CP 0.1 1.0 0.5 1.2 1.1 0.7 0.4 0.0 1.6 0.1 0.0 0.1 0.9 0.4 2.6 10.8 Repo 0.0 0.0 0.0 0.2 2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.2 0.9 5.2 2H 2008 0.2 0.3 0.8 10.3 2.4 0.5 2.7 0.0 4.7 0.5 0.0 3.2 1.7 2.6 9.5 39.3 CD 0.0 0.1 0.0 7.7 0.9 0.4 2.3 0.0 2.5 0.1 0.0 2.6 1.2 1.2 5.5 24.5 CP 0.2 0.2 0.8 2.1 0.9 0.1 0.4 0.0 2.2 0.4 0.0 0.6 0.5 0.6 2.9 11.7 Repo 0.0 0.0 0.0 0.6 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 1.1 3.0 1H 2009 0.1 0.6 1.3 14.3 4.3 0.0 3.0 0.0 5.0 0.5 0.5 3.0 1.9 2.1 10.0 46.7 CD 0.0 0.6 0.5 11.4 2.2 0.0 2.4 0.0 3.7 0.3 0.5 2.1 1.3 1.2 6.2 32.4 CP 0.1 0.0 0.9 2.1 1.0 0.0 0.6 0.0 1.3 0.2 0.0 0.9 0.6 0.5 2.1 10.4 Repo 0.0 0.0 0.0 0.8 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 1.7 4.0 2H 2009 0.1 1.3 1.2 14.7 5.6 0.4 3.2 0.0 5.7 0.9 0.3 2.9 2.5 1.4 10.7 50.8 CD 0.0 1.0 0.6 11.7 2.7 0.4 2.4 0.0 4.8 0.7 0.2 2.0 1.9 0.6 6.8 35.8 CP 0.1 0.3 0.6 2.7 1.7 0.0 0.8 0.0 0.8 0.2 0.1 0.9 0.6 0.2 1.3 10.2 Repo 0.0 0.0 0.0 0.3 1.2 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.5 2.6 4.8 1H 2010 0.0 1.0 1.2 11.1 6.7 0.0 2.0 0.0 5.4 0.9 0.0 1.7 2.3 1.6 9.5 43.4 CD 0.0 0.7 0.4 9.1 2.3 0.0 1.0 0.0 4.1 0.5 0.0 1.2 1.6 0.4 5.8 27.2 CP 0.0 0.3 0.8 1.7 2.3 0.0 0.9 0.0 1.0 0.4 0.0 0.5 0.7 0.5 1.1 10.3 Repo 0.0 0.0 0.0 0.3 2.1 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.8 2.5 5.9 2H 2010 0.1 0.9 1.1 13.2 6.9 0.0 1.3 0.0 6.0 0.9 0.0 0.5 2.8 2.8 9.4 45.9 CD 0.0 0.5 0.6 10.4 2.4 0.0 0.4 0.0 4.4 0.5 0.0 0.3 2.2 1.4 4.5 27.5 CP 0.1 0.3 0.5 2.2 2.1 0.0 0.9 0.0 1.1 0.4 0.0 0.3 0.6 0.3 2.0 10.7 Repo 0.0 0.0 0.0 0.6 2.5 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.0 1.1 2.9 7.7 Feb. 2011 0.2 0.2 1.0 12.4 7.6 0.0 1.3 0.0 6.1 0.0 0.0 0.2 2.8 4.0 8.6 44.3 CD 0.1 0.0 0.3 8.6 2.8 0.0 0.1 0.0 4.3 0.0 0.0 0.1 2.1 2.0 3.7 24.2 CP 0.0 0.2 0.7 2.9 2.0 0.0 1.2 0.0 1.3 0.0 0.0 0.1 0.7 0.8 1.7 11.6 Repo 0.0 0.0 0.0 0.9 2.8 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.0 1.2 3.2 8.5 AU – Austria. BE – Belgium. DK – Denmark. FR – France. DE – Germany. IE – Ireland. IT – Italy. LU – Luxembourg. NL – Netherlands. NO – Norway. PT – Portugal. ES – Spain. SE – Sweden. CH – Switzerland. U.K. – United Kingdom. Source: Fitch Ratings, MMF public Web sites, and SEC filings. 4 March 30, 2011 Fitch Ratings ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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