Australian Banks Lose Appetite for Money Market Funds

Australian banks have reduced their reliance on US money market funds (MMFs), aided by slow credit growth and an increase in deposits, according to a report by Fitch Ratings.

Fitch says that the move is part of the banks’ long-term strategy to replace wholesale funding with deposits to increase the stability of their funding profile and address the new Basel III liquidity requirements. To this end, Reserve Bank of Australia (RBA) data show deposits now account for more than 50% of funding compared with 40% in 2008.

MMFs’ exposure to Australian banks fell 10% on a dollar basis to 7.6% during May, according to the agency’s report ‘US Money Fund Exposure and European Banks’. This is driven by banks’ reluctance to take a potentially volatile form of funding.

Australian banks are currently selective about their funding sources because elevated saving levels and recently enacted covered bond legislation ensure ample funds in desirable forms. Fitch says that it expects some retrenchment in the funding mix when demand for credit increases, but does not anticipate a return to the pre-2008 funding mix.

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