Banks in Denmark have so far made a point of shielding their retail depositors from negative interest rates.
But more than 3 1/2 years into the policy (and with central bank Governor Lars Rohde signaling rates may not go positive until 2019) “something has to give,” according to Jesper Berg, the director general of the Financial Supervisory Authority in Copenhagen.
For Berg, the most likely scenario is that banks start charging more fees. “Clearly, the longer it lasts,” the greater the “need to find other solutions,” he said in an interview.
The Danish Bankers Association acknowledges that lenders may have no choice. It also predicts that depositors will be forgiving in the end. “In the long run, customers will understand that it’s not reasonable to get something for free,” said Niels Storm Stenbaek, the association’s chief economist.
But in the short term, the outlook is grim. When mortgage lender Nykredit recently announced fee increases (to help meet higher capital requirements), there was a public outcry. Denmark’s consumer ombudsman has since been involved, as have lawmakers. Hardly a day goes by without disgruntled Nykredit customers getting prominent play in Danish media.
Danske Bank last month renewed a pledge that its retail depositors won’t be charged negative rates. But that approach is proving costly. Danske’s chief financial officer, Henrik Ramlau-Hansen, said the lender lost more than 2 billion kroner ($296 million) in 2015 because of narrowing deposit margins.
Denmark is emerging as the global test case for what happens when a financial industry is subjected to an extended period of negative interest rates. And the Danish experience has revealed some unexpected twists. Rohde says 2015 was the best year for banks in his country since 2008. Danske reported its biggest result ever and its shares have outperformed those of most of its big European competitors since the end of December.
The Bank for International Settlements said this month that “modestly” negative rates affect money markets and other rates much as positive rates do, save for retail deposits. But BIS says it’s unclear what will happen the longer negative rates persist and the deeper into negative territory central banks delve. This is especially true as the policy’s “debilitating impact” on profitability becomes evident, it said.
Danish banks are responding to negative rates with cost cuts. But they’re also benefiting from lower impairments and from clients shifting their savings from deposit accounts to asset management services, generating more fee income. And Berg notes that the unique Danish mortgage finance system -- where interest-rate risk is borne by borrowers and bond investors rather than the issuing bank -- has also protected the industry.
There are still a few caveats. There’s a lag effect that has yet to play out as banks continue to make money on older loans that charge higher interest rates. Only once these contracts fade out will the full effect of negative rates be clear, Berg at the FSA says.
According to Christian Hede, an analyst at Nordea Bank, banks will have little choice than to raise fees.
“We know the current low rates hurt banks,” Hede said. “If banks won’t go to negative rates for personal clients -- which is still not really in the cards -- then higher fees are the only place they can make up that cost.”
The one thing Berg doesn’t want banks to do is rely more on market funding as an alternative to deposits. A deposit surplus has “unpleasant earnings implications,” Berg said. “But it is important to think of the sustainability in the long run.”