Danish banks discussing whether to charge for deposits will end up hurting themselves as they repel customers and raise their reliance on wholesale funding, Business and Growth Minister Ole Sohn said.
Denmark’s banks have come under pressure after the central bank in July cut its deposit rate to an unprecedented minus 0.2 percent. Governor Nils Bernstein, who uses monetary policy to defend the krone’s peg to the euro, has said he can’t soften his focus on the exchange rate even as banks pay the price.
Lenders in the Nordic nation have since discussed the option of passing the negative deposit rate on to clients in an effort to cover their costs, according to the Danish Bankers Association. Danske Bank A/S and Sydbank A/S, Denmark’s biggest and third-largest lenders, said this week some professional counterparties already pay as short-term money market rates sink below zero. Banks in the U.S., Sweden and Canada have also started charging clients on Danish krone deposits.
“I have a hard time imagining that this is a good business move,” Sohn said in an e-mailed reply to questions. “My expectation would be that customers would leave pretty quickly. Some banks still need to attract customers to help address their deposit shortfalls.”
State Street Corp. and Bank of New York Mellon Corp., two of the world’s biggest custody banks, are charging clients for krone deposits. State Street accounts will carry a rate of minus 0.75 percent annually, according to a client note, while BNY Mellon started charging for krone deposits last month, a person familiar with the matter said.
Last week, Swedish bank SEB AB started charging some customers for deposits held in Danish kroner, said Laurence Westerlund, a spokesman for the Stockholm-based lender.
Royal Bank of Canada is also imposing negative interest rates on some customers who hold Danish kroner and Swiss francs. Should nominal interest rates turn positive again, “we would reflect this change in the interest rates applicable to client balances,” Katherine Gay, a spokeswoman at the Toronto-based bank, said in an e-mailed statement.
Danske Bank “doesn’t want to be arbitraged by professional counterparties,” said Jens Peter Neergaard, global head of markets at Danske. “If they leave balances on the account, depending on the client and if it’s a big amount, there will be a negative rate.”
For most of the bank’s clients, Danske continues to offer a flat or positive deposit rate, he said.
“Banks have repeatedly tightened their credit standards and raised their prices to boost their earnings,” Sohn said. “The banks are free to set their own rates, but imposing negative deposit rates would naturally limit their competitiveness.”
Interest rates on new bank lending to households rose to 6.6 percent in the second quarter on average, from 6.2 percent a year earlier, while rates on outstanding loans increased to 6.1 percent from 5.3 percent, according to central bank data.
The increase helped boost the industry’s aggregate net interest income an annual 2 percent in the first six months to 25.7 billion kroner, the Financial Supervisory Authority said Oct. 1. Banks and mortgage lenders extended the increases into the third quarter and expect to raise prices further, the central bank said Oct. 8 in its quarterly lending survey.
Denmark’s banks have been weakened by the central bank’s decision to cut its deposit rate below zero, Fitch Ratings said last month. According to Anders Dam, the chief executive officer of Jyske Bank A/S, Denmark’s financial industry will lose about half its banks by 2020 as troubled lenders struggle to fund themselves.
“There’s healthy competition in the Danish banking sector,” Sohn said. “There’s always the possibility that people will start to prefer cash.”