(Bloomberg) -- Ever since negative interest rates became a thing, banks have been too afraid to pass them on to retail depositors. That may be about to change.
In Scandinavia, where sub-zero rates have been the norm longer than most other places, the finance industry has undergone several drastic adjustments to survive the regime. Banks have relied more on asset management and other services that generate fees, and less on the traditional business of lending and holding deposits. But with no end to negative rates in sight, those changes may not be enough.
The director of the the Danish Bankers' Association, Ulrik Nodgaard, says shielding retail depositors from negative rates means that "banks are selling their products below cost price." And that is clearly "a challenge."
Jesper Berg, the head of the Danish Financial Supervisory Authority in Copenhagen, says that so far banks haven't passed negative rates on to private customers for "political reasons." But if they finally do, "it will be interesting to see whether customers would accept that, or vote with their feet" and withdraw their savings.
Banks have so far balked at the idea. The first lender to charge depositors risks losing them, and any industry agreement to coordinate a move would expose banks to cartel charges. At Danske Bank A/S, spokesman Claes Lautrup Cunliffe recently underscored the sentiment, saying it does "not plan to introduce negative rates to private customers, even wealth customers."
Investors Weigh In
But key investors may not accept that approach much longer. Sampo Oyj, the Finnish holding company that owns about 20% of Nordea Bank Abp, says it's high time attitudes change on the subject. Kari Stadigh, the chief executive officer of Sampo, says the European Central Bank, which oversees Nordea and other euro-zone banks, needs to stop shirking the issue.
"I don't think it would necessarily destroy retail banking at all," Stadigh said in an interview in Helsinki. "People would actually then have to pay for their deposits, so actually it could even bring stability to the banking sector."
Stadigh says that only when the finance industry acknowledges this will the ECB's efforts to pump stimulus into the economy really work.
"I don't think the ECB will reach their goals with the present thinking that they have on monetary policy unless they are able to enforce a framework where all banks would have negative interest rates on their deposits," he said. "The theory works only when fully implemented, and a full implementation of quantitative easing requires negative deposit interest rates, so that people start to invest and consume, also in the private sector."
Berg at the Danish FSA says the there's now a "higher risk" that retail customers would walk out on any bank that forces them to share the cost of negative rates.
But some European banks are already biting the bullet. In Switzerland, UBS Group AG recently decided to charge wealthy clients on deposits that exceed 500,000 euros ($560,000), in addition to introducing negative rates for clients holding large Swiss franc balances. Credit Suisse has said it will impose a fee on customers holding more than 1 million euros.
In Denmark, the FSA has warned that low rates increase banks' incentive to advise customers to move their money from deposit accounts to investment products that come with high fees. The watchdog has made clear it won't tolerate excessively high fees after Danske was caught overcharging clients.
Berg says it's clear that development was fueled by the negative-rate environment, as banks look for ways to mitigate the pain.
In the past, banks would "make money from getting cheaper [deposit] funding than market funding," Berg said in July. "That channel throughout Europe is dead." They would also profit from taking short-term duration risks, "but the yield curve is flat right now, or in that neighborhood, so they don't get that 1% or 2% which they historically got on doing that sort of business." And now, "the fee channel is also threatened."
According to Stadigh, "the thing that's missing here" is that the ECB isn't forcing banks to pass negative rates on "fully into society. They do it only where it's easy."
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