Margin Battle Unites FSA, Banks in Finland as Subzero Costs Loom

Finland’s Financial Supervisory Authority is fighting a proposal that would force mortgage lenders to pass on negative rates to customers amid concerns that Europe’s experiment with extraordinary monetary easing will erode financial stability.

Typically, lenders charge borrowers a margin on top on money market rates. As those have gone negative -- in tandem with European Central Bank cuts -- banks are finding that revenue stream is getting squeezed. In response, they’ve begun including clauses in contracts that stipulate margins won’t change, regardless of rate fluctuations.

Now, a working group that includes Finland’s Justice and Finance ministries is recommending a ban on the emerging practice. The proposal, which is expected to be put to parliament in coming weeks, is a mistake, according to Anneli Tuominen, director general of the Helsinki-based FSA. While beneficial perhaps to borrowers, it threatens banks’ ability to generate profits, she said, joining lenders in their opposition to the plan.

“Our stance is that banks should get their margins even in these circumstances,” Tuominen told Bloomberg. “We see a big threat to solvency if we follow the working group’s proposal.”

In its latest efforts to revive the region’s economy, the ECB last week expanded its quantitative-easing targets, introduced a new refinancing program and cut all its main interests. That brought the key deposit rate down 10 basis points to a record minus 0.4 percent.

In this environment, bank customers can’t escape higher costs, according to Tuominen. If parliament adopts the proposal, lenders probably will raise margins and tack on other fees elsewhere. Banks, she said, “must get their yield from somewhere.”

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