Negative Rate Extremes and Why One Bank’s Doing Better Than Most

  • Danske Bank says years more below zero won’t hit retail base
  • Danish two-tier rate system has saved banks pain, Danske says

The country with the longest history of negative interest rates continues to hold surprising lessons for a world wondering how the experiment might end.

In Denmark, central bank rates have (almost without interruption) been below zero since mid-2012. Danske Bank A/S, the country’s biggest financial conglomerate, says that even after 4 1/2 years the regime isn’t as punishing as you’d expect. With most predictions pointing to at least two more years before Danish rates turn positive, Danske is confident it can ride out that period without passing the cost on to retail customers.

Denmark’s central bank pegs the krone to the euro. Its main rate is minus 0.65%.

According to Christoffer Mollenbach, Danske’s head of treasury, the Danish central bank’s model has proved an effective way to use negative rates without causing undue pain to the financial industry.

Read more: Denmark’s latest efforts to defend its currency peg

The central bank has two deposit operations: The industry uses a (limited) current account facility, which has a rate of zero, as a first stop. The rest goes into a deposit facility, which imposes the benchmark (negative) rate. The approach means the negative rate isn’t imposed on the entire amount. Mollenbach says other central banks could learn from Denmark’s tiered system.

“This is one thing the ECB could look at,” Mollenbach said in an interview from his office in Copenhagen on Monday. “It is one way of getting the marginal rate negative, which you want, but also protecting the system against the most negative impacts of negative rates.”

Zooming Ahead

Danske has done remarkably well with negative rates, in contrast to a lot of bigger European banks, including Deutsche Bank AG. The Danish lender, which has assets that comfortably dwarf Denmark’s GDP, had its best year on record in 2015 (the latest period for which annual figures are available). The bank, which has been cutting costs, raised its outlook in the third quarter after booking more income from trading income. Since mid-2012, shareholders in Danske have enjoyed a return in excess of 180 percent, trouncing the Dow Jones Industrial Average and the MSCI World Index of stocks.

Danske passes negative rates on to corporate clients, but Mollenbach says the retail deposit base is safe. The bank can absorb the cost of protecting private customers thanks to the two-tiered deposit facility at the central bank, he says.

“If we didn’t have a two-tiered central bank system, I think this would be much harder,” he said. “It underpins our commitment to retail depositors that we won’t charge negative rates. We fully price through the 65 basis points in our markets business. But where we have more stable deposits, we have them at zero.”

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