Canadian Treasurer

February 8, 2012

Fitch: Prime MMF flows favor Australian and Canadian Banks

NEW YORK--Fitch Ratings says US prime money market funds (MMFs) have reduced their exposure to Euro Zone banks by 72% since the end of May, according to our most recent study of the holdings of the 10 largest U.S. prime MMFs. Over that same period, MMF investments have flowed to Australian and Canadian banks (among others) with MMF exposure increasing by 12% and 23%, respectively.

The recent shifts in MMF exposure likely reflect investor perception that Australian and Canadian banks are less risky than their Euro Zone peers. However, we believe our research illustrates the potential short-term nature of USD funding provided by MMFs. Given their risk aversion and focus on liquidity, MMFs are prone to proactively withdraw funding at the first sign of trouble in a region, underscored by investor flight from Euro Zone banks in the second half of 2011. We believe that even in situations where MMFs represent a relatively small fraction of a bank's overall funding, noticeable MMF withdrawals are a negative market signal and could spark broader investor and counterparty concerns about an institution's funding liquidity.

We do not expect the level of MMF financing to reach dangerous levels for either Canadian or Australian banks, but note that risk can arise from either excessive reliance on short-term funding or potentially from too narrow an investor base.

We feel that overall the major Canadian banks have a strong funding profile compared to peers with a substantial deposit base and healthy liquidity position. Although the funding profile for the major Australian banks is viewed as comparatively weaker due to a greater reliance on wholesale funding, we believe the recent reduction in short-term wholesale funding replaced by deposits and longer term financing highlights an improving trend.

Taken together, we believe increased funding for Australian major banks from MMFs and a reduced proportion of short-term wholesale funding points to MMFs displacing other short-term funding providers and increasing their share of lending. Although participation from MMFs is likely to be volatile, we continue to expect short-term wholesale funding to continue to reduce for Australian banks over the medium term.

For additional information on this topic, please see Fitch's recent reports: "Australian and Canadian Major Banks: Structural Features Favourable, but Funding Remains a Key Issue for Australian Banks," dated Jan. 31, 2012 and "U.S. Money Fund Exposure and European Banks: Euro Zone Diverging," dated Jan. 26, 2012, both available on Fitch's Web site



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