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TEXT-Fitch: Euro banks say no tanks to U.S. MMF, project finance
April 5, 2012 / 3:32 PM / 6 years ago

TEXT-Fitch: Euro banks say no tanks to U.S. MMF, project finance

(The following statement was released by the rating agency)

April 5 - Fitch Ratings’ research has shown that U.S. prime money market funds (MMF) have moderately increased their exposure to Eurozone banks over the past few months after significantly reducing these positions during the second half of 2011. Despite this recent uptick, Eurozone banks appear to have become less reliant on U.S. dollar (USD) funding from MMFs and have cut down their USD activities. This reduced appetite for MMF funding has likely contributed to a significant dip in Eurozone bank lending to project and trade finance, sectors that historically have largely been USD-denominated. Eurozone banks recently have not been as keen to use MMF funding as in the past, since it has become less reliable. For instance, according to its 4Q11 results presentation, Societe Generale reduced USD liquidity needs for its corporate investment bank during the second half of 2011 by USD55bn (or 55%). Additionally, BNP Paribas reduced USD funding needs for its corporate investment bank by USD57bn during the same period. Regulators are reinforcing efforts by Eurozone banks to limit reliance on short-term USD funding, as reflected in the European Systemic Risk Board’s recent recommendations (ESRB/2011/2). Eurozone banks seem to be readjusting their business models in response to their lower reliance on U.S. MMFs. Clearly, banks only want funding they can count on, and some Eurozone banks may feel that U.S. MMFs no longer fit that bill. Fitch believes this “partial disengagement” stems in large part from the adjustment challenges that some euro zone institutions experienced during the money fund pullback in 2011. The Bank for International Settlements (BIS) reported a 16% reduction between 3Q11 and 4Q11 in new USD lending by “weaker EU banks,” which included several large Eurozone financial institutions. In addition, the BIS noted a 39% reduction in project finance, a 24% decrease in trade finance, and a 41% dip in aircraft and ship leasing over the same period. We believe that this pullback by Eurozone banks stems mostly from more stringent funding and capital requirements under Basel III. It has created meaningful funding challenges for the project finance sector and could spur increased reliance on capital markets. A shift to bond financing would mark a departure from the past few decades, in which commercial banks have provided the bulk of project finance lending through direct loans. Project finance bond markets, particularly in Europe, are not well positioned to accept the high volume of activity expected, especially for larger projects. In both Europe and the U.S., investors have limited appetite for non-investment-grade infrastructure debt, which could ultimately increase the cost of financing projects. For more information, see the special report, “U.S. Money Fund Exposure and European Banks: A Partial Disengagement,” dated March 22, 2012, available at (Caryn Trokie, New York Ratings Unit)

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