Banks just changed the rules of the negative rate game for Danes
Denmark is about to become a test case for what happens when banks start charging a lot of customers to store their money.
That's because one of the country's biggest banking groups just changed the rules of the game, by removing the floodgate that had shielded most retail depositors. Until Friday, only people with roughly $1 million in surplus cash at their banks were facing a negative rate. Now, the threshold has been reduced to just over $100,000, with no guarantee it won't go lower.
Other banks have hinted they'll follow and economists say the development marks a major shift in how monetary policy will be felt across the economy.
Denmark's latest response to negative interest rates has made it an even more interesting case study for the European Central Bank. Jan Storup Nielsen, a senior analyst at Nordea, reckons that many hitherto unknown consequences of negative rates will finally play out in the real world.
"So far, it's just been a lot of theories about what will happen, but now we get a chance to see it in real life," Nielsen said. "For the rest of Europe and the ECB this is perfect, because they can let Denmark learn all the consequences and then see what they should decide."
Jyske Bank A/S, Denmark's second-largest listed lender, said it had no choice but to impose negative rates on all private customers with 750,000 ($110,000) or more. Chief Executive Officer Anders Dam said the latest Danish rate cut this month means Jyske is now "losing even more money" when it deposits excess reserves at the central bank at minus 0.75%. Dam also says it's possible the rule will be extended to an even larger group of depositors.
As Jyske's investors digested the news and calculated its likely effect on the bank's net interest income, its share price soared. Jyske rose 5.3% on Friday and started Monday more than 1% higher in Copenhagen trading, even as other European banks fell.
Denmark's monetary policy is designed to defend the krone's peg to the euro. But its effect on the broader economy is being closely watched. Danes have now spent seven years with rates below zero — a world record — and Dam at Jyske says he's bracing for another eight.
Normally, low rates encourage more household spending as it gets cheaper to borrow and less appealing to save. In Denmark, negative rates have led to a surge in mortgage refinancing, but they've also coincided with a record build-up of consumer deposits. And, as is the case in much of the rest of Europe, inflation is missing in action.
"Households have gotten all the benefits of negative rates so far, but now they're starting to see the bad side of negative rates," Nielsen said.
The ECB's new message on how long it'll keep interest rates low is supportive for the economy and risky for markets. President Mario Draghi raised the bar for any future policy tightening with a pledge that a new round of quantitative easing will end only "shortly before" key interest rates rise. That commitment was meant to reassure investors that the stimulus will continue until inflation is solidly back in line with the goal of just under 2%.
For consumers, it's made more sense to keep their cash in a deposit account that paid zero, rather than invest in short-term market products at negative yields. Jyske's decision now has implications for everything from debt levels to inflation.
But it may not just be a question of economic theory. In Germany, lawmakers have debated whether to ban banks from passing negative rates on to retail depositors. Finland's regulator has also asked its lawyers to examine the legality of the practice. In Denmark, politicians have voiced concerns.
"I'm worried," said Lisbeth Bech Poulsen, a member of the Socialist People's Party on which Denmark's Social Democrats rely to govern. Banks "are supposed to increase lending. This entire discussion is a sign that there is something completely wrong in the economy." Poulsen, who sits on parliament's finance committee, says she wants a "political discussion" about potentially introducing "a mechanism that prevents banks from imposing negative rates on their customers."
Other lawmakers made a similar point. "If banks start to impose negative rates on regular clients, we have a problem," said Victoria Velasquez, a member of parliament for the Red Green Alliance that also forms part of the government bloc. "And we are open to discussing a mechanism to block it."
But whether banks lend more or consumers deposit less, the monetary upshot is likely to be broadly the same. Rasmus Gudum, a senior economist at Handelsbanken in Copenhagen, says passing on negative rates to more retail clients "will enhance the transmission mechanism."
Gudum also says that Jyske Bank's decision was an important step for a finance sector worried about spooking retail clients. "The stigma has been removed," he said.
Nielsen at Nordea says it's not a given consumers will spend more. After years of real wage growth, shrinking unemployment and lower borrowing costs, "the vast majority of Danish households already consume what they think is appropriate," he said. Instead, he expects Danes to contribute more to their pension savings.
At the Danish Consumer Council, a consumer rights group, economist Ida Marie Moesby worries that "people will take their money and invest in risky assets."
According to Statistics Denmark data for 2017, more than 163,500 Danes had cash savings of over 750,000 kroner, which is the threshold at which the European Union's deposit guarantee kicks in. Rasmus Mandsberg, an economist at the Danish central bank, says the number is probably higher now, given that private savings have grown nearly 14% since. According to the central bank, aggregate deposits totaled 1 trillion kroner as of July.
Denmark's central bank governor, Lars Rohde, has said policy makers in Copenhagen still have scope to cut the deposit rate below minus 0.75%, which would mark a trip into no-man's land. For now, Denmark shares its record for the world's lowest benchmark rate with Switzerland.
But if more commercial banks start extending negative rates to ordinary Danish savers, the mythical lower bound in interest rates might finally have been reached, according to Nielsen at Nordea.
"Yes, we're definitely starting to see the consequences for real," he said.