After almost eight years of negative interest rates, banks are fighting back.
In Denmark, where rates have been below zero longer than anywhere else, most of the biggest banks this year broke an old taboo and forced retail depositors to share the cost. But now, the left-leaning government of 42-year-old Prime Minister Mette Frederiksen is questioning the legality of that step.
There’s a lot at stake. In Denmark, where the central bank uses monetary policy to keep the krone pegged to the euro, Governor Lars Rohde says rates may not go positive until well into the next decade. The regime has already forced banks to dramatically alter their business models to survive. But with regular customers now in the crosshairs, banks find themselves bracing for a legal battle.
Kjeld Gosvig-Jensen, the executive director in charge of legal affairs at the Danish Bankers’ Association in Copenhagen, says the legislation is clear.
“There’s nothing in the law that prevents banks from applying negative interest rates to private customers’ deposit accounts,” he said. “Negative rates for private customers only cover the costs that banks themselves incur. And, in our assessment, that’s fully covered by the law.”
But Business Minister Simon Kollerup, a 33-year-old whose debut presiding over Denmark’s bank laws coincides with one of the most challenging periods in the industry’s history, says he’s asked the Financial Supervisory Authority to probe the matter more closely.
The FSA’s “provisional assessment is that Danish banks are allowed to charge negative interest rates because, under current legislation, it is a contractual matter between banks and their customers,” Kollerup said. Nevertheless, “It is important to get full clarity regarding the rules and therefore I have asked the FSA for a thorough assessment,” he said.
The Social Democrat government that Kollerup is a part of is backed by parties that are more outspoken. The Socialist People’s Party, for example, this year called on parliament to look into whether Denmark should introduce “a mechanism that prevents banks from imposing negative rates on their customers.”
On Monday, the finance ministry published a report on Denmark’s economic outlook that included a section on negative rates. It said the policy risks denting lending in other countries, such as Italy, where rates are below zero and bank earnings are low. It also noted there’s so far no sign that’s happening in Denmark.
Finance Minister Nicolai Wammen says he wants banks to be healthy, but that it should be possible to achieve that “in a responsible way, without necessarily passing the bill on to customers.”
Similar concerns have been voiced in other parts of Europe where negative rates are now the norm. In Finland, the FSA last month arrived at the conclusion that the law doesn’t explicitly ban the practice, but also called it “problematic.” For now, Finnish banks haven’t passed on negative rates to retail clients. Nordea Bank Abp, which is based in Helsinki, only demands fees of its wealthy retail clients in Denmark.
There’s growing political irritation over negative rates, with Europe’s finance ministers starting to push back against the European Central Bank‘s subzero policy.
But there’s a monetary policy argument against shielding consumers from negative deposit rates; if they spend instead of save, then they’re acting in accordance with the goals of expansionary monetary policy. The question is whether people avoiding negative deposit rates will buy more stuff, or be drawn into risky investment options.
Banks in Denmark, where the benchmark interest rate first went below zero in mid-2012, didn’t wait for lawmakers and regulators to make up their minds. Jyske Bank, Sydbank and Spar Nord Bank -- all systemically important inside Denmark -- this year started passing negative rates on to their richest retail clients.
Danske Bank has so far promised clients it won’t follow suit. That’s as Denmark’s biggest lender deals with the aftermath of a vast money laundering scandal that has dented its reputation and prompted management to step up focus on customer satisfaction. It’s also worth noting that lenders with large mortgage units, like Danske, have been shielded from the full effect of negative rates as they rake in fees from a refinancing wave triggered by low rates.
The first Danish bank to pass negative rates on to its richest retail clients was Jyske Bank. Back in August, when the lender announced it was taking the step, it voiced concern that life below zero might continue for another eight years. Such predictions have policy makers paying attention.
“I am following the ongoing debate on negative interest rates, both in Denmark and abroad,” Kollerup said. “I understand why it is a subject that is attracting a lot of attention from both banks and customers.”
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