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Bank Credit Quality & European MMF Regulations Concern Treasurers


European corporate treasurers are concerned by decreasing bank credit quality, global banking and European money market fund (MMF) regulation, according to a live survey of 90 delegates at Fitch Ratings' third annual cash management conference in London last week. The event was hosted by Fitch's Fund and Asset Manager Rating group.



The survey highlights the challenges faced by short-term investors, who are confronted with Basel III regulation that is reducing banks' appetite for short term funding and a potential overhaul of European MMF regulation:

--70% of delegates view daily liquidity and cash flow matching as primary objectives of short-term investors. This objective came well ahead of achieving yield, which 17% listed as a primary objective.

--Almost two-thirds of delegates consider the VNAV vs. CNAV issue as the most important matter in the proposed European MMF regulation. UK investors, who were more strongly represented in the audience, are more sensitive about this question than other European investors.

--Three-quarters of delegates think that their allocation to MMFs would decrease if the majority of MMFs were to move to VNAV as a consequence of the proposed regulation. As a result, they would expect to reallocate cash away from MMFs into bank deposits and direct investments in short-term instruments.

--40% of delegates stated that changes in bank credit quality are treasurers' biggest challenge with Basle III and MMF regulations cited equally as the second biggest challenge.

--80% of delegates said that MMF ratings are explicitly mentioned in their investment guidelines. They value MMF ratings for providing inputs in their risk analysis (49%) and an assessment of the manager/investment process (28%).

During the seminar, analysts from Fitch's Fund and Asset Manager, Sovereign and Financial Institutions groups provided a detailed overview of the sovereign, bank and MMF landscape. Although short-term credit risks have abated, challenges remain. For example, the presentations illustrated the shrinkage of the eligible counterparty universe, on the back of recent years' downward migration of sovereign ratings and banks' intrinsic ratings. Of the top 25 banks, 44% were rated 'A' or above at end August 2013, compared with 88% as of end-2007.

Fitch's bank analysts elaborated on the evolution of bank support and its expected likely impact on ratings in certain jurisdictions due to regulatory and political shifts. Absent offsetting fundamental improvements or other idiosyncratic factors, bank Issuer Default Ratings most at risk of downgrades are those anchored at the level of their Support Rating Floor (SRF), in jurisdictions where the propensity to provide support is seen as weakening. This would result in further shrinkage of the eligible counterparty pool of most treasurers.

Fitch's fund and asset manager analysts showed that MMFs ratings remain stable and that managers continue to actively manage the yield curve and their eligible issuer list, despite this backdrop of supply shortage, coupled with ultra-low yields.

The conference also included a presentation on the status of European short-term markets and a panel discussion with industry experts. The panel discussed the importance of the operational efficiency of MMFs and how the unintended consequences of a change in the MMF operating model could have an impact on smaller treasurers, notably in terms of the tax and accounting treatment of MMFs.

Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
European Money Market Fund Quarterly - Euro - 3Q13
European Money Market Fund Quarterly - Sterling - Q313
European Money Market Fund Quarterly - US Dollar - Q313
Money Market Funds (MMF) Snapshot - End-September 2013
Evolving Bank Support: Impact on Money Market Funds

Vendredi 15 Novembre 2013
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