Bankers Who Pioneered Negative Retail Rates Hit a Milestone

(Bloomberg) -- They may still be feared by bankers elsewhere, but negative retail deposit rates have now gone mainstream in Denmark.

Fourth-quarter results show that all Denmark's largest banks have started charging their retail depositors for amounts as low as $16,000, marking the biggest pass-through in the world of negative central bank rates to regular customers via their banks.

Karen Frosig, chief executive of Sydbank A/S, says Denmark's bank industry has finally managed to normalize something that remains taboo elsewhere. “It isn't causing any noise anymore, which is great,” she said by phone on Tuesday, after reporting quarterly earnings. “My deposit surplus is now over 30 billion kroner ($4.9 billion), and we can't afford not to charge for that.”

Denmark has had negative interest rates longer than any other country, after the central bank first went below zero in mid-2012 to defend the krone's peg to the euro. Initially, commercial banks feared a backlash from customers. But over time, they caved. By 2015, a few pioneers took the first step by charging business customers. Now, all big Danish banks impose negative rates on business and retail deposit accounts.

So far, though, Danish banks seem unique in their willingness to charge customers. That's despite mounting evidence that negative rates won't lead, as once feared, to bank runs and bundles of cash stashed under mattresses.

In a fresh review by the International Monetary Fund, researchers conclude that while negative rates remain “politically controversial,” that's in large part because they're “misunderstood.” In practice, they work well in stimulating lending and lowering longer-term yields, the review showed.

Morten Spange, chief monetary policy adviser at Denmark's central bank, says the development among commercial banks in his home country is likely to make monetary policy more efficient.

“It's a strengthening of the pass-through,” he said.

Frosig says it's a two-way street: Danes get lumped with negative rates on their deposit accounts, but they also enjoy some of the world's lowest mortgage rates. “The whole thing fits together,” she said.

Read More: Danes Get 20-Year 0% Mortgages After Interest Rates Sink

Meanwhile, the European Central bank said back in August that the pass-through effect of its negative rate to households remained “negligible,” as commercial banks balk at the idea of sending that cost on to their retail depositors.

Stefan Gerlach, chief economist at EFG Bank in Zurich and a part of the SNB Observatory, says there's still a concern that sharing that burden with retail customers will ultimately hurt business.

“Banks recognize that it's better business for them to absorb some of the losses right now in the hope of maintaining their client relationship for the long haul,” he said.

Euro-zone and Swiss banks don't feel the full effect of negative rates on all their central bank deposits because of tiering systems. Danish central bank Governor Lars Rohde in 2019 rebuffed a plea by banks to introduce a similar system, saying to do so would be the equivalent of taking money out of the government's coffers.

Not all Danish banks have shown equal abandon in passing negative rates on to their retail clients. Danske Bank A/S, which is still struggling with image issues stemming from a money-laundering scandal, maintains a higher threshold than its peers before charging its depositors. Nykredit and Nordea also tolerate higher retail deposits before imposing negative rates.

The minister in charge of Danish banking legislation, Simon Kollerup, has urged the industry not to delve too deep into negative interest rates for consumers. In a comment to Borsen, Kollerup said he hopes banks don't go further, but also said it's up to lenders to decide.

Some banks have already said they may have to go lower. Birger Krogh Nielsen, the chief financial officer at Jyske Bank A/S, says deposit margins remain “well below half” the 100 basis points earned historically. So Jyske may decide to impose negative rates on amounts lower than its current threshold of 100,000 kroner ($16,000), he said.

“We monitor the market closely and can't give any guarantees,” Nielsen said.

Read More: Banks in Denmark Pile on Deposit Charges as Negative Rates Bite

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