RPT-Fitch: UK Banks Reduce MMF Usage as Liquidity Buffers Peak

Tue May 7, 2013 5:55am EDT

May 7 (Reuters) - (The following statement was released by the rating agency)

UK banks' use of funding from US prime money market funds (MMF) has continued to decline in early 2013, consistent with their ongoing efforts to reduce reliance on wholesale funding, Fitch Ratings says. Overall, short-term wholesale funding has now most likely reached minimum levels.

US MMF exposures to UK banks fell to 4.3% of assets under management at end-March, a 16% decline over the last nine months and a new low over our period of study (which dates back to end-2006). However, we do not expect MMF flows to UK banks to dip significantly below this level as the banks need to maintain some access to this form of short-term funding as part of their strategy to diversify funding sources.

The reliance of the two banks most affected by the crisis (RBS and Lloyds) on wholesale debt markets has reduced due to their deleveraging, liquidity accumulation and build-up of customer deposits. Overreliance on short-term debt is no longer a negative rating driver for these UK banks. Short-term wholesale funds, including some US MMF flows, was covered 3.7x by the liquidity portfolio at RBS and 3.8x at Lloyds at end-Q113.

The banks' liquidity portfolios are at, or approaching, peak levels and we do not expect them to reduce significantly in the short-to medium-term because loan demand is still muted in the UK. Liquid assets could be used to buy back surplus (and more expensive) wholesale funding. A reduction in liquidity is unlikely to be a negative rating driver as their buffers remain among the highest in Europe.

Since July, the Funding for Lending Scheme has provided an additional funding source. While primary usage of this scheme has not been as high as the government expected, a secondary impact has been to reduce funding costs across the board. With less need for liquidity and still muted loan growth, deposit rates fell to their lowest levels since the crisis. The extension of the scheme last month to January 2015 is likely to continue to support low funding costs.

A detailed review of March MMF flows and shifts in exposure to banks around the world can be found in the special report "U.S. Money Fund Exposure and European Banks: Decline Amid Eurozone Concerns," dated April 30, 2013, at www.fitchratings.com.

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