RPT-Fitch: French Bank US MMF Flows Won't Rise to Previous Heights
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Oct 1 (Reuters) - (The following statement was released by the rating agency)
French banks' efforts to change their business mix and use more stable sources of funding mean that their US prime money market fund (MMF) exposure should stay well below pre-2011 levels, Fitch Ratings says. Nevertheless, more positive investor sentiment towards Eurozone banks has driven a rise in MMF flows to the region, particularly in France where allocations are at a two-year high.
MMFs increased their French bank allocations to 9.1% of assets in August, from lows of 1% at end-2011. But on a US dollar basis it is still only 55% of the end-May 2011 level - before MMFs sharply reduced their exposure to Eurozone banks amid intensifying concerns in the region.
The first reason why we believe MMF flows will remain lower is that French banks have re-adjusted their business mix as this source of dollar funding became less reliable. French banks intentionally reduced their dollar needs in trading activities and trade/asset finance, and are continuing to dispose of legacy assets - largely pre-crisis structured finance investments. They are also cutting back specialised and leverage finance activities. Societe Generale and BNP Paribas, in particular, reduced their needs for their corporate and investment banking businesses by USD55bn and USD57bn, respectively, during H211.
Another reason why banks are not as keen to use MMF funding as they were in the past is the regulatory drive to reduce the use of short-term wholesale funding through the introduction the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) under Basel III. French banks have strengthened their funding and liquidity profiles in several ways since mid-2011 - including deleveraging, raising customer deposits, issuing long-term debt, and increasing liquidity buffers.
MMFs accounted for less than 2% of the major French banks' total funding at end-2012, so the banks are not reliant on this funding source. Future amounts placed by MMFs with French banks will depend on the price they are willing to accept. MMFs have not proven to be a stable funding source, so the remuneration banks are ready to offer is accordingly lower. We anticipate that the banks will continue to place funds with the central bank to bolster liquidity cushions, which also mitigates funding risks.
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