World Economy

Danmark Negative Rates Policy Benefits Customers

Ultra-low rates have also spurred more households to refinance their mortgages.Ultra-low rates have also spurred more households to refinance their mortgages.

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, Bloomberg reported.

“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 A/S, the country’s biggest lender, has repeatedly underscored its deep reluctance to pass on the cost of negative rates to retail customers.

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 ($112,000), which is the amount protected under deposit guarantee rules.

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.”