May 7 (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