Prime money market funds (MMFs) across the board saw their market risk increase in Q1 2015 driven by Moody's Investor Services’ new banking methodology released in March.
However these stressed net asset value (NAV) results do not incorporate the use of Counterparty Risk (CR) assessments or the change in our reference point for deposit securities to the senior deposit rating from the senior unsecured rating. Overall, we expect these changes to drive improvement in Q2 NAV stress results.
During the first quarter, prime MMFs cut their exposure to European financial institutions, following banks' attempts to comply with upcoming Basel III requirements. The drop was the most pronounced in the US.
US prime MMFs' exposures to financial institutions experienced big shifts in Q1 2015.
"In the space of a month, exposures to French, UK and Swedish financial institutions dropped by 50 per cent, 45 per cent and 30 per cent, respectively, between February and March. These are among the largest banking system exposures," says Robert Callagy, a Moody's Vice President.
The fall is attributable to banks' efforts to reduce short-term borrowings to comply with upcoming Basel III leverage and LCR requirements. Aggregate exposure to financial institutions in US prime funds fell 21 per cent in March, outpacing the three percentage point decline in US prime MMF assets under management (AUM) over the same period.
Credit profiles and market risk deteriorated, following rating negative reviews of a large number of banks globally.
For euro prime MMFs, assets under management (AUM) grew by 6.6 per cent to EUR87 billion in Q1 2015. "They have hit their second-highest level in twelve months, as prime funds continue to attract assets, offering the 'least worst' yield compared with government money funds and bank deposits," says Vanessa Robert, a Moody's Vice President – Senior Credit Officer.
The new Basel III leverage and liquidity rules have significantly depressed banks' appetite for deposits. Aggregate exposure to European financial institutions in Q1 2015 plummeted by 10 percentage points to 27 per cent of total investments – or EUR 23.2 billion – the lowest level in twelve months. This drop was mainly driven by a EUR6.2 billion reduction in French bank paper.
More exposure to long-dated securities combined with downward pressure on ratings resulting from the Moody's new banking methodology contributed to the deterioration of the stressed NAV to 0.9906 from 0.9919.
AUM grew, as sterling-denominated prime funds' balances reached a twelve-month high in Q1 2015. "Assets under management have soared to GBP115.7 billion, with 4.5 per cent growth in Q1. UK prime funds attracted inflows as the new Basel III leverage and liquidity rules weighed on banks' appetite for deposits," observes Vanessa Robert, a Moody's Vice President — Senior Credit Officer.
Sterling MMFs reduced their aggregate exposure to European financial institutions, which fell by four percentage points from the start of 2015 to 33 per cent of total investments (or GBP38 billion) at the end of Q1 2015, the lowest level in twelve months. Like euro-denominated MMFs, this drop was mainly due to the GBP4.1 billion reduction in French bank paper.
The credit profiles and market risk of sterling money market funds deteriorated in Q1. Exposure to Aa3 or higher rated securities declined to 55 per cent of assets under management from 60 per cent in Q4.
