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Bankers Get No Mercy in Denmark as Plea for Help Is Rejected

Bankers Get No Mercy in Denmark as Request for Help Is Rejected

(Bloomberg) -- Bankers in Denmark aren’t finding much love in the country’s halls of power.

On Monday, the central bank roundly rejected finance industry entreaties to ease the burden of the world’s longest negative interest-rate experiment. At the same time, the Danish minister in charge of financial legislation said he thinks banks “clearly” face a challenge in proving they deserve people’s trust after multiple scandals.

Simon Kollerup, the business minister, says he doesn’t “have a problem with financial companies earning money.” But after Danske Bank’s Estonian laundromat affair and a separate scandal in which the lender overcharged retail investors, the minister says that “one of the most important tasks” facing bankers today is “to restore confidence.” He wants to make sure banks “live up to their social responsibilities. There have been too many examples where they haven’t done so.”

The scandals at Danske, Denmark’s biggest bank, have already cost many of its former top executives their jobs, and triggered multiple criminal investigations. Meanwhile, investors have turned their backs on the bank, driving its stock down more than 30% this year after losses of almost 50% in 2018.

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It’s not just banks that are dealing with bad press in Denmark at the moment. Digital payments firm Nets A/S just offered to cut the fees it charges charity organizations on their donations, following widespread public outrage. Speaking after a meeting with the charities, Kollerup said he plans to reach out to Nets to discuss its policy. “It’s the job of authorities in the end to find out when a fee is set unreasonably high,” he said. “That should be able to be controlled.”

But Denmark’s long-term negative interest rates may prove a bigger blow to the financial industry than its bad reputation. The central bank, which uses monetary policy to keep the krone pegged to the euro, first cut its main rate below zero in mid-2012. One lender now predicts up to eight more years of life below zero.

A few Danish banks have recently started passing on the cost of negative interest rates to their richest depositors, though the step remains controversial and Danske has guaranteed its retail clients they won’t be affected.

To help the industry cope with the monetary environment, the Danish bankers’ association, Finans Danmark, has been lobbying the central bank to expand its current account facility, which sets a lower limit of 0% on the reserve deposits it accepts from commercial banks. The facility currently only accepts just under $5 billion, which Finans Danmark says isn’t enough.

On Monday, central bank Governor Lars Rohde made clear he has no intention of considering such a measure. In a speech to industry representatives, Rohde said it’s not his job to shield commercial banks from negative rates. He also said that if he were to expand the current account facility, he’d have to cut the benchmark rate on the deposit facility even lower than its current minus 0.65%, to defend the euro peg properly.

“The deposit and current account facilities are monetary policy instruments and not instruments intended to support banks’ profits,” Rohde said. “The current account facility is to ensure that the daily liquidity flows are conducted in a safe and fluid manner. In the current situation, an expansion of the current account facility would reduce the effect of the deposit rate on money market rates. A considerable increase of the current account facility would, therefore, require a reduction of the deposit rate in order to ensure the same pass-through to money-market rates that support the fixed exchange rate. So all in all, nothing would be gained.”

What’s more, Rohde said he rejects the idea that banks aren’t making enough money. Between 2012 and 2018, Danish banks made about $32 billion in combined profits, compared with an aggregate cost of less than $590 million over the period, he said.

The largest banks continue to enjoy high earnings, according to Rohde. He said part of the reason banks are generating solid profits is thanks to small impairments on loans. He also said banks shouldn’t expect to relive the levels of return they enjoyed in 2016 and 2017, when profits reached historic highs.

Ulrik Nodgaard, the head of Finans Danmark, said the lobby group was disappointed by Rohde’s comments. He said his organization had “urged” the central bank to expand the current account facility, in order to “ease the situation we’re in now, in which banks’ earnings are under huge pressure, as has been the case for a long time.”

Nodgaard also made clear he’s not giving up. “We will continue our dialogue with the central bank regarding the situation in the industry and its challenges,” he said.

At savings adviser Nordnet, investment economist Per Hansen says that part of the concern is that banks may no longer be attractive investments.

“If you’re not making a decent return on capital, longer term you’re not able to attract new funding or new equity, if you need that,” he said by phone. “The business isn’t growing, the demand for new loans is fading, compliance costs are ballooning, and at the same time you see a flattening of the yield curve and a negative deposit rate with no possibility currently of passing on that cost to depositors. That is really squashing the banks.”

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net;Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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