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Related Research
Fitch Comments on Summit, Oct. 28, 2011
U.S. Money Funds and European Banks: French Exposure Down, Oct. 20, 2011 French Banks: Under Market Fire, Sept. 29, 2011 The Euro Area Financial Crisis How Does it End?, Sept. 20, 2011 European Banks and Market Turmoil, Sept. 20, 2011
Risks Increasing: The risks of a negative shock are rising and could alter Fitchs stable rating outlook for U.S. banks. Fitchs base case rating assumption underpinning bank ratings is that eurozone sovereign debt concerns will be dealt with in an orderly fashion, i.e. there will not be a disorderly debt restructuring or forced exit of any country from the euro.
Analysts
Joseph Scott +1 212 908-0624 joseph.scott@fitchratings.com Christopher D. Wolfe +1 212 908-0771 christopher.wolfe@fitchratings.com Thomas Abruzzo +1 212 908-0793 thomas.abruzzo@fitchratings.com
www.fitchratings.com
Banks
Public Disclosure Not Complete
Disclosure is generally limited to aggregate claims outstanding to a country greater than or equal to 0.75% of a banks assets. Consequently, it is not possible to gather complete exposures for all countries. Total country exposures include deposits, central bank balances, securities, loans, participations, acceptances, fair value of derivatives, and reverse repos, among other items, but details of many categories are not disclosed. The long lag time before FFIEC quarterly country exposure data become available also hampers analysis.
Selected Outstandings
(US$bn) French Banks 2Q11 BAC C JPM GS MS 8.9 15.7 22.8 38.5 28.1 2010 13.0 11.2 16.0 29.4 39.0 2009 N.A. 11.4 16.2 8.8 9.7 2Q11 3.8 18.3 9.4 5.4 14.0 UK Banks 2010 5.5 9.5 9.3 5.6 7.6 2009 8.5 6.5 12.8 3.3 13.2
BAC Bank of America Corp. C Citigroup Inc. JPM JP Morgan Chase & Co. GS Goldman Sachs Group Inc. MS Morgan Stanley. N.A. Not available. Sources: 10Q and FFIEC reports.
Beyond direct exposure, money market funds (MMFs) affiliated with major U.S. banks have additional exposure. While not contractually required, banks oftentimes offer support to affiliated MMFs in the event of need for business/reputation reasons. Looking at the 10 largest U.S. prime MMFs, three are affiliated with U.S. banks. Within these MMFs, European bank exposure totaled $89bn (39% of aggregate T1Cs) as of Sept. 30, 2011, down from $110bn in August and $116bn from July. This exposure is concentrated at systemically important European banks in large countries. Major portions included French banks ($13bn), German banks ($15bn), and U.K. banks ($20bn). Exposure to French banks was reduced from $28bn in August and $35bn from July. (See U.S. Money Funds and European Banks: French Exposure Down, dated Oct. 20, 2011, for additional details). A coordinated initiative of the U.S. Federal Reserve bank with other central banks, including the ECB, Bank of England, and Swiss National Bank, recently introduced U.S.-dollar liquidity measures to calm market nervousness over continued reductions in U.S. MMF funding. This initiative enables European banks access to dollar repo operations as needed. (See European Banks and Market Turmoil, dated Sept. 20, 2011, for more details.)
Banks
centers. Tough market conditions not only curtailed deal flow and customer trading activity, but also resulted in significant mark-downs of inventories.
BAC Bank of America Corp. C Citigroup Inc. JPM JP Morgan Chase & Co. WFC Wells Fargo & Co. GS Goldman Sachs Group Inc. MS Morgan Stanley. N.A. Not available. Source: Company reports.
Rating Implications
Fitch believes that, unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks could be negatively affected. Although Fitch believes that
U.S. Banks European Exposure November 16, 2011 3
Banks
framework commitments agreed at the Euro Area Summit in late October represent a positive step toward supporting financial stability, effectiveness will depend on greater clarity on details, as well as full and timely implementation. (See Fitch Comments on Euro Area Summit, dated Oct. 28, 2011, for additional details.) Fitchs rating outlook for the U.S. banking industry currently remains at stable, reflecting the generally improved capital and liquidity position of most U.S. banks, coupled with the fact that ratings for U.S. banks still remain generally lower than pre-crisis levels. Nonetheless, the risks of a negative shock are rising and could alter this view, even for banks with little or no exposure to Europe. While it would appear that the eurozone debt crisis is largely a big bank issue, Fitch is of the view that the consequences could affect global economic growth and further weigh down the U.S. economy. Ratings of U.S. banks could be pressured if difficulties in Europe, combined with domestic economic challenges, result in significant incremental revenue pressure, combined with a reversal of positive asset quality trends. U.S. banks have been reporting improving asset quality in 2010 and to date in 2011. This positive trend could change course if contagion effects translate into a slowdown in general economic activity. The U.S. economy already faces continued pressure on real estate and persistently high unemployment, combined with fiscal pressures at the government level.
Banks
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