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Negative Deposit Rates Trigger Legal Review at Nordea’s Watchdog

Negative Deposit Rates Trigger Legal Review at Nordea’s Watchdog

(Bloomberg) -- Finland’s financial regulator is trying to figure out whether it’s legal for banks to pass on negative interest rates to retail depositors.

The review comes against a backdrop of long-term negative rates across much of Europe, with Finland’s biggest financial group, Nordea Bank Abp, recently saying it can’t rule out that it will need to charge private customers who use its deposit accounts.

“We just want to check first, whether it’s legal,” Jyri Helenius, the deputy director of the Finnish Financial Supervisory Authority, said in an interview in Helsinki. “We’re waiting for our lawyers to weigh in, based on a thorough analysis.”

The question has sparked considerable public interest as monetary policy in Europe languishes below zero. On Thursday, the European Central Bank cut its deposit rate to minus 0.5% in a move that has the financial industry worried about its future. In Denmark, where rates have been negative for seven years, some banks have already started passing on the cost to their richest retail depositors.

Learn More About the ECB’s Decision:

The ECB cut interest rates further below zero and said it’ll resume bond purchases as President Mario Draghi overcame critics of his stimulus policies to make a final run at reflating the euro-area economy. Click here to read more.

Financial Stability

Helenius says Finland’s regulator first wants to find out whether there’s any legal impediment to drawing retail depositors into the fray before considering the broader question of whether their deposits should be protected from negative rates for reasons of financial stability.

“I won’t speculate on the risk of a bank run” that might follow if retail depositors face negative rates, he said. “It’s such a new world that we are living in, so I will not speculate.”

The question of passing negative rates on to average depositors has galvanized lawmakers in Germany, who have debated whether to ban the practice. Helenius says that any steps Finland takes would need to be coordinated with the ECB. There are also questions as to whether retail depositors would shift their cash away from European Union countries that allow negative deposit rates to countries in which the policy is prohibited.

Capital Flows

Given the EU’s requirement that capital be allowed to flow freely within the bloc, depositors would be able to move their savings without impediment. Restricting people “from using banking services in a different EU country would go against the principle of free movement of capital,” Helenius said.

The question then is whether a cross-border bank such as Nordea would derive any benefit from charging depositors if one of the countries in which it operates bans the practice.

The extent to which negative rates are actually a problem for banks has also been questioned. In Denmark, most lenders have substantial mortgage units, which have seen profits go up as more homeowners pay to remortgage into loans at lower rates. In Sweden, the head of the financial supervisor, Erik Thedeen, says that while negative rates pose a challenge for banks’ business models, the industry still has “good profitability and also makes money on other things than net interest income.”

Here’s What Nordic Banks Are Doing:

  • Jyske Bank A/S. Denmark’s second-biggest listed lender, said in late August it was planning to levy negative rates on deposits held by its richest clients starting in December. The charge will apply to amounts above 7.5 million kroner ($1.1 million). Chief Executive Officer Anders Dam said at the time that after seven years of negative Danish rates, something had to give. “We had always thought that negative rates were a temporary thing,” he said in an interview published on the bank’s website. “It now appears that they’ll be more permanent. The expectation is that there could be negative rates for the coming eight years.”
  • A week later, Sydbank A/S followed Jyske Bank and said it will also need to start charging retail depositors with more than 7.5 million kroner. Both Danish banks will apply a 0.6% negative rate. “In this environment we’re in now, it will be harder and harder to earn money,” Sydbank CEO Karen Frosig said at the time. “It ought to trigger some consolidation, but we haven’t seen it yet.”
  • Danske Bank A/S, Denmark’s biggest lender, said in mid-August it won’t share the pain of negative rates with its retail depositors. The bank has “no plans to introduce negative interest rates on personal savings or current accounts,” said Chief Financial Officer Christian Baltzer at the time. He has since been replaced in a management shakeup.
  • Nordea’s new CEO Frank Vang-Jensen this month wouldn’t rule out passing on negative rates to retail savers. The Nordic region’s biggest bank is “closely following” the situation, he said on Sept. 5. “It’s a complicated question. You need to look at each country and understand what is the environment, what is the interest rate level and what are the competitors doing, and then we just need to decide on that. Actually we have never been in that situation before.”

--With assistance from Hanna Hoikkala and Frances Schwartzkopff.

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

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

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