World Record in Negative Rates Has Surprising Lesson for Banks

  • Danish bankers association head says NIRP good for impairments
  • Banks may get through whole NIRP cycle without passing on cost

The head of the bankers’ association in Denmark, where interest rates have been negative longer than anywhere else on the planet, says the policy may not be as punishing for lenders as once thought.

According to Ulrik Noedgaard, a former head of Denmark’s financial regulator who now runs the Danish Bankers Association, one lesson is that banks suffer fewer impairments when rates are extremely low. Ultra-low rates have also spurred more households to refinance their mortgages, generating additional fees for banks. And the industry has managed to cut costs significantly.

Ulrik Noedgaard

Photographer: Jeppe Carlesen/Danish Bankers Association

“It is comforting that, even in an environment with negative interest rates, earnings are at a reasonable level,” Noedgaard said in an interview in Copenhagen. “Not an impressive level, but at a reasonable level.”

Because of this, “it’s plausible” that Danish banks will make it through the entire cycle of negative rates without having to pass on that cost to their retail clients, he said.

Danish rates have been mostly negative since mid-2012. Most economists predict they’ll stay below zero well into 2018, a scenario the central bank has signaled is quite likely. The bank only uses monetary policy to defend the krone’s peg to the euro. That’s proved increasingly difficult as the European Central Bank delivers wave after historic wave of monetary stimulus, driving down the value of the euro in the process.

In Denmark, a AAA-rated economy and home to the world’s largest mortgage-backed covered-bond market, negative rates have become the norm to which the entire financial industry has adapted. Danske Bank, the country’s biggest lender, has repeatedly underscored its deep reluctance to pass on the cost of negative rates to retail customers.

Danish bank deposits were close to a record in August, just shy of an all-time high reached in April this year, according to Nykredit, which crunched central bank data published on Tuesday. Correcting for seasonal swings, deposits have never been higher than they were in August, also when adjusting for inflation, Nykredit said.

Raiffeisen Bank

Noedgaard says banks in Denmark took note when a Raiffeisen bank in a Bavarian village passed through the ECB’s negative deposit rate to retail customers on savings exceeding 100,000 euros ($112,000), which is the amount protected under deposit guarantee rules.

Click here to read more about negative rates for the people.

While the “drag on earnings” of negative rates is “substantial,” the monetary policy climate is “special” in many ways, he said. There are “basically zero impairments, if you look across the sector.”

Record Year

There’s no sign that any Danish banks are moving closer to passing negative rates on to their retail clients, even after almost half a decade of the policy. “The fact that we are actually able to earn money even in this environment is one factor, and the other factor is what will be the customer reaction,” Noedgaard said.

The governor of Denmark’s central bank, Lars Rohde, said back in March that 2015 ended up being the most profitable year for the country’s lenders since 2008. Danske Bank, which has operated in a negative-rate environment longer than any other major lender in the world, delivered its best result ever in 2015, if you exclude goodwill charges.

Tipping Point

How Danish banks tackle the negative rate environment in the years ahead depends on whether rates drop even further below zero, Noedgaard said. Denmark’s benchmark deposit rate has been minus 0.65 percent since January, and was 10 basis points lower for most of last year. “It’s also about the level. It could go lower.”

“There are some strong forces that make the case for not” passing on negative rates to retail clients, he said. “But there could be a tipping point where the pros and cons tip in favor of going down that road.”

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