As the Nordic region’s biggest bank reveals it may pass negative central bank rates on to clients, the industry is poised to break a taboo it didn’t dare breach just 2 1/2 years ago.
Back in 2012, when Denmark first cut its benchmark deposit rate below zero, commercial banks balked at the suggestion they could share that cost with retail clients for fear of losing business. Now, with rates even lower and the prospect of further cuts, banks are considering charging the people whose deposits provide their funding.
“We cannot pay interest on an account and then deposit the money at negative rates in the central bank,” Christian Clausen, chief executive officer of Nordea Bank AB, said in an interview in Stockholm. “It simply won’t fly.”
The shift comes as central banks delve deeper into their monetary war chests than ever before to fight back the threat of deflation. Finland, the only Nordic nation inside the euro area, uses the European Central Bank’s deposit rate, now minus 0.2 percent. Denmark cut its deposit rate twice last week, bringing it to minus 0.35 percent, to deter speculation it would follow the Swiss and abandon its euro peg.
Banks may now be less reluctant to pass on negative rates to clients thanks to surplus liquidity.
“Banks don’t have a need for deposits, and the demand for loans by households and firms is weak,” Niels Storm Stenbaek, chief economist at the Danish Bankers Association, said in a phone interview. “The likelihood has never been greater” that banks will pass on negative rates to customers, he said.
But taking the unprecedented step “will really make clients angry, seriously angry,” said John Norden, CEO of Mybanker, which researches bank prices for consumers. “They’ll go to another bank or stick it under their pillow.”
In Germany, the largest euro-zone economy, savers face similarly bleak prospects. While Deutsche Bank AG and Commerzbank AG, Germany’s largest lenders, aren’t charging consumer clients for deposits, other banks have begun to do so. Deutsche Skatbank, a lender in the eastern state of Thuringia, said in late October that it would charge an annual 0.25 percent on some accounts.
Some Nordic banks say negative rates on retail deposits are an absolute last resort.
“We have discussed this a lot in the bankers’ association, how this can be handled,” Annika Falkengren, CEO of SEB AB, said today at a press conference in Stockholm. “We have experiences from Denmark, where we have seen a little bit how it works. I think that as a bank you will do your utmost not to have negative rates” on normal savings accounts, she said.
Nordea already requires institutional customers to pay for their deposits in Denmark, Clausen said. Like many banks, Nordea, Danske Bank A/S and Jyske Bank A/S have cut Danish deposit rates to zero on so-called budget accounts.
Banks have so far hesitated to cut deposit rates below zero amid competition to attract customers. Santander Consumer Bank, a recent entrant to the Danish market, offers 1.25 percent on savings accounts that don’t require customers to lock in their money for a fixed period. Similar accounts pay as little as 0.5 percent in Denmark. Most banks that match Santander’s rate don’t let customers withdraw their funds for three years, according to Mybanker.
Everyone’s “waiting for the first bank to” start charging on deposits, Jesper Rangvid, a finance professor at Copenhagen Business School, said in a phone interview. “If the public says it makes sense, given the low central bank rates,” then other banks “will follow. But if there’s screaming and shouting, then it depends on how long” rates stay negative, he said.
The current rate environment “is of course not to our liking because our liquidity buffers have to be invested in negative interest instruments” and “our deposit margins are getting negative,” Clausen said.
“We’re in a very low interest-rate environment for a long time so the difference between having zero and negative is not that big,” he said. Paying to deposit money while being charged to borrow is generating negative margins, and that is “of course a problem.”