Fitch: Regulatory Changes Upending Banks and MMFs Relationships

NEW YORK--(BUSINESS WIRE)-- Changes in the U.S. regulatory environment will reduce the ability of money market funds (MMFs) to provide funding to banks, according to Fitch Ratings. However, we believe this should have minimal impact on U.S. banks that have been relying less on this form of funding due in large part to regulatory pressures of their own.

MMF regulatory reforms adopted by the Security and Exchange Commission (SEC) including the introduction of floating net asset valuation (NAV) for institutional prime MMFs and fees and gates for retail and institutional prime funds are likely to weaken the attractiveness of money funds as a cash management tool and result in asset shifts away from prime money funds. Floating NAV introduces potential fluctuations in the value of investors' cash as well as administrative, accounting, and tax issues while fees and gates may also raise investor concerns about access to liquidity.

Estimates of the scale of anticipated outflows range from 10% to 60% of the approximately $1 trillion of institutional prime money fund assets over the course of the two-year implementation period that ends October 2016.

In response to the SEC rule changes, a number of fund complexes, including Fidelity, Federated, and BlackRock have made changes to their money market fund lineups. Changes impact both institutional and retail accounts and include converting prime funds to government funds and revising the investment strategy of certain prime funds to limit portfolio maturities in an effort to reduce fund volatility. Money fund managers are also developing alternative liquidity products such as private money funds, short-term bond funds, and separately managed accounts.

Outflows and fund conversions limit the ability of money funds to act as a source of wholesale funding to banks; however, regulatory changes in the banking sector should serve to lessen any impact on bank funding. Regulators have pressured banks to reduce their reliance on wholesale funding, deeming it inherently unstable in times of crisis. In 2007 and 2008, investors exited the wholesale funding market, in some cases causing borrowers to cover loans by selling assets at impaired prices. Fitch research based on FDIC data indicates that total wholesale funding has dropped from 26% of bank liabilities in 2007 to 18% of bank liabilities as of June 30, 2014.

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Changes in the banking sector include the introduction of liquidity measurements such as the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). The LCR standard for U.S. banks was finalized by federal regulators in September 2014 and will be phased in by January 2017. The NSFR is widely expected to be proposed in the U.S. over the next 1-2 years. Moreover, the U.S. Federal Reserve has released a proposal for calculating the Globally Systemic Institution Bank (G-SIB) buffer that would establish an additional capital surcharge based on a bank holding company's reliance on wholesale funding.

See the full report for detail: "U.S. Banks to Weather Money Fund Reform," available at www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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