Banks Near Tipping Point as Negative Rates Draw Danish Warning

(Bloomberg) -- After years of negative interest rates, Europe’s banks may soon need either to change their business model or shrink, according to the head of the financial watchdog in Denmark.

Speaking in an interview, Jesper Berg, the director general of the Financial Supervisory Authority in Copenhagen, suggests that the industry is close to a tipping point at which “something needs to give.”

Berg oversees a bank sector that, more than any other, has felt the brunt of negative rates in Europe. The central bank of Denmark first cut its main rate below zero in 2012 to maintain the krone’s peg to the euro. Seven years later, there’s still no sign rates will turn positive. Recently, the chief executive of one of Denmark’s biggest banks said he’s girding for another eight years of negative rates.

Richest Bank Clients Are Sharing the Pain:

A second Danish bank has targeted its richest depositors and announced it will impose negative interest rates on large retail accounts. Sydbank A/S, Denmark’s third-biggest listed bank, will follow Jyske Bank A/S and place a rate of minus 0.6% on retail deposits larger than 7.5 million kroner ($1.1 million), according to a statement on Wednesday. Click here to read more.

Banks Near Tipping Point as Negative Rates Draw Danish Warning

Berg has previously spelled out all the ways in which negative interest rates are hurting the financial industry (with smaller loan losses marking a rare bright spot). Before negative rates, banks operated in a world in which deposit funding was cheaper than market funding. That world basically no longer exists.

Earlier this month, Jyske Bank became the first in Denmark to announce it will start charging its wealthiest retail depositors, or those holding more than 7.5 million kroner ($1.1 million). But the country’s biggest lender, Danske Bank, has said it won’t do the same.

In the “surreal” world in which interest rates are below zero, as Berg puts it, the people running Europe’s banks need to come up with new ways to make money. That’s especially true if retail clients react to negative deposit rates by withdrawing their cash.

“There are financial stability threats for any significant transition in terms of how the structure of the system looks,” he said by phone. It’s “similar to what applies to any other industry. The textile industry also had to restructure itself at some stage.”

“If you continue to stay in this environment, something needs to give,” Berg said. “So it’s a conditional forecast that can be influenced in a benign way by management actions.”

Read What Berg Has to Say About Risky Investing:

In an interview, Jesper Berg warns that retail investors are being forced into riskier asset classes than they’re likely to be comfortable with because of the ultra-low return environment. Click here to read more.

The Danish bankers’ association wants the central bank to look into easing the burden of negative rates on the financial industry by expanding a deposit facility that lets lenders park excess reserves at 0%. Berg says he won’t join the debate because only the central bank can make that call.

If more commercial banks end up passing on the cost of negative rates to their retail depositors, then people may start hoarding cash. That would put even more pressure on the financial industry to shrink. Berg also points out that the current benign business cycle has helped keep loan losses low, but that may change.

“With higher provisions in a less benign phase of the business cycle, with pressure on net interest income, with pressure on fees, then the daily business would look less attractive,” he said. “This applies across Europe, across large parts of the world, and obviously management will have to react.”

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