Bank Depositors in Denmark May Be Facing Record Negative Rates

(Bloomberg) -- After more than seven years of negative rates, some of Denmark’s biggest banks are wandering through a no-man’s land of business options in order to cope with the extreme monetary regime.

At Sydbank A/S, Chief Executive Officer Karen Frosig says she’s going to need to pass on negative rates to a record number of retail depositors. She also said she may need to cut the rate on their accounts below the central bank’s benchmark of minus 0.75%. That’s currently the world’s lowest rate, which Denmark shares with Switzerland.

Passing on the pain of negative rates to retail depositors, once taboo, is fast becoming the “market standard” in Denmark, Frosig said in an interview on Wednesday. She spoke after announcing cost cuts that will hit headcount, as life below zero makes it increasingly difficult to run a bank.

Bank Depositors in Denmark May Be Facing Record Negative Rates

No other country has lived with negative rates as long as Denmark. At Jyske Bank A/S, the expectation is that the policy, which started in 2012, may last another eight years. It’s already led to dramatic adjustments in the banking world, with more lenders relying on other revenue streams besides traditional lending to stay profitable. Banks that have mortgage units are the lucky ones, as borrowers respond to falling rates by refinancing, incurring fees in the process.

“If you’d asked me five years ago whether we would have negative rates on deposits in Denmark, I wouldn’t have been able to imagine reaching that point,” Frosig said. Now, she says she’s “stopped guaranteeing anything.”

Danish bankers are at the front line of a monetary experiment that’s drawing an increasing number of skeptics. In Sweden, the Riksbank has made clear it’s eager to exit the policy after almost half a decade below zero. In Denmark, the central bank uses negative rates for the sole purpose of defending the krone’s peg to the euro.

Sub-Zero Skepticism:

One of Christine Lagarde’s most important tools for stimulating inflation might be falling out of favor even before she gets to wield it as European Central Bank president.
Doubts over negative interest rates are beginning to surface among policy makers on the continent where they first appeared half a decade ago. A growing contingent of officials at the ECB in Frankfurt are starting to wonder if they cause more harm than good, and Sweden’s Riksbank seems desperate to be rid of them altogether.

Birger Nielsen, chief financial officer at Jyske, says how far the bank goes in requiring retail clients to accept negative rates depends on the bigger picture.

“It depends on the market development,” Nielsen said in an interview. “We’ve historically had a positive margin, which now has turned into a negative margin, and we need to reestablish the profitability on deposits. Whether we will go lower, hopefully not... But we monitor it closely on a continuous basis.”

Spar Nord Bank A/S, another systemically important lender in Denmark, on Thursday pointed to the continued erosion of its net interest margins due in part to negative rates. The bank is planning to introduce rates below zero to depositors, starting in January, in an effort to mitigate the impact of the policy on its earnings.

Spar Nord’s CEO, Lasse Nyby, said in an interview that he’d like to see deposits fall, but not if that means losing customers. So Spar Nord is unlikely, at least in the short term, to lower the threshold at which it starts charging retail clients for their deposits, he said.

That, however, assumes Denmark’s central bank doesn’t lower its rates again. Should that happen, Nyby said the bank would have to reconsider its plans.

But there may be a silver lining. Spar Nord says pushing negative rates over to retail clients may, in the coming months, lead to “potentially growing demand for investment products.”

©2019 Bloomberg L.P.

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