May 30 (Bloomberg) -- Denmark’s experience with negative interest rates shows the policy won’t undermine bank industry health and even allows lenders to set themselves up for a rebound, according to the Financial Supervisory Authority.
Since the Danish central bank cut its deposit rate below zero in July, net interest income at the nation’s lenders has dropped to its lowest in five years. Yet the figures show a temporary effect that won’t leave lasting scars on the industry, said Ulrik Noedgaard, director general of the FSA.
“It is a drag on net interest income, that is clear,” Noedgaard said in an interview in Copenhagen. “On the other hand, there is essentially a hidden future earnings there because once interest rates start to normalize, the earnings from that component will go up.”
Denmark resorted to negative interest rates last year in response to a capital influx that had threatened the krone’s peg to the euro. Though the bank initially said the step took it into “uncharted territory,” it later declared the policy a success as investors backed off Denmark’s AAA rated assets.
The FSA says its assessment shows the currency defense didn’t unduly damage Denmark’s bank industry, which is now showing signs of recovering from a burst housing bubble.
“What we see -- and what we have been seeing, but especially going forward now -- is that earnings will be significantly higher than impairments for the system as a whole,” Noedgaard said.
The comments come as other central banks in Europe discuss the merits and risks of negative rates. In Switzerland, the central bank has held its main rate at zero since August 2011 in a bid to prevent franc appreciation beyond a 1.20 cap against the euro.
European Central Bank President Mario Draghi, who cut the euro zone’s benchmark refinancing rate on May 2 to a record-low 0.5 percent, said then he has an “open mind” on reducing the deposit rate below zero.
The ECB is “prepared so that in case of a need we could implement” negative rates, Governing Council member Christian Noyer said this week. “I’m personally not convinced there’s an interest in doing that.” Denmark cut its deposit rate to minus 0.2 percent in July, and raised it 10 basis points in January.
According to Jesper Berg, senior vice president and head of regulatory affairs at Nykredit A/S, the threshold at which rates make a difference to banks isn’t zero.
“It has huge symbolic value but in practice, it’s not a magic number,” Berg said in an interview. “What Draghi has to learn from Denmark is that he can go below zero, but not a lot.”
Businesses taking up loans of 7.5 million kroner or more paid on average 1.58 percent in interest in April, the lowest rate since at least 2007, the central bank said today. The rate on existing loans fell to 3.88 percent, also a low, the bank said.
Net interest income for Denmark’s banking industry fell in 2012 to its lowest level in five years. Income dropped by 2.3 percent, to 50.4 billion kroner, the FSA said May 16. An increase in bank fees helped mitigate the decline, lifting combined net interest and fee income by 0.3 percent. Writedowns rose 11 percent after falling the previous two years.
“It’s not a question of whether it’s sustainable or not,” Noedgaard said of the negative rate. “The really important thing is to have sufficient earnings to match the writedowns and potentially build up more capital, and we expect the Danish banking system to be in such a position even if the earnings from these deposits are potentially quite low.”
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at firstname.lastname@example.org