ANALYSIS DANMARKS NATIONALBANK 27 APRIL 2021 — NO. 9 The response of house- hold customers to negative deposit rates Negative deposit Reduction in Announcement rates more deposits following increases demand widespread announcements for investments Negative deposit rates There are indications Household customers for household custom­ that household cus­ appear to increase their ers are now being tomers reduce their de­ demand for investment applied by most banks posits when their bank fund shares and switch in Denmark. Further­ announces negative their deposits to pool more, the banks have interest rates. However, schemes when faced gradually reduced the household customers’ with prospects of nega­ thresholds for when total deposits have tive deposit rates. negative interest rates increased during the are imposed. period of negative deposit rates. Read more Read more Read more ANALYSIS — DANMARKS NATIONALBANK 2 THEDANMARKS RESPONSE OF HOUSEHOLDNATIONALBANK CUSTOMERS TO NEGATIVE DEPOSIT RATES ANALYSES Low for long Denmark was the first country to introduce negative ABOUT THIS ANALYSIS monetary policy rates in 2012. Since then, Switzer- land, Sweden, Japan and the euro area have followed Most banks in Denmark have now in­ suit. troduced negative deposit rates for household customers. Furthermore, Very low and in some cases negative interest rates the banks have gradually reduced the thresholds for when negative have characterised the past decade across the ad- interest rates are payable. vanced economies. There are several reasons why inter­­est rates have fallen to the current low levels. Low There are indications that household interest rates reflect the fact that inflation has been customers reduce their deposits subdued in many countries, but structural changes when their bank announces negative in household and corporate savings and investment interest rates. Household customers behaviour are also part of the explanation. also appear to react to the prospects of negative deposit rates by increas­ These developments have brought monetary policy ing their demand for investment and the economy into uncharted waters, which is fund shares and by switching their why Danmarks Nationalbank will be issuing a series deposits to pool schemes. of publications on the topic. Danmarks Nationalbank’s interest rate Danmarks Nationalbank’s key interest rate has been negative since the summer of 2012, with the exception of a brief period in 2014. Per cent 14 12 10 8 6 4 2 0 -2 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 ANALYSIS — DANMARKS NATIONALBANK 3 THE RESPONSE OF HOUSEHOLD CUSTOMERS TO NEGATIVE DEPOSIT RATES Negative interest rates have become more widespread for Danish household customers Chart 1 Jyske Bank Sydbank Spar Nord Bank Ringkjøbing Landbobank Nordea Den Jyske Sparekasse Nykredit Bank VestjyskBank Jutlander Bank Lån & Spar Bank Danske Bank Arbejdernes Landsbank Handelsbanken Sparekassen Kronjylland Sparekassen Sjælland-Fyn Sparekassen Vendsyssel Jul 19 Sep 19 Nov 19 Jan 20 Mar 20 May 20 Jul 20 Sep 20 Nov 20 Jan 21 Mar 21 Announced Implemented Threshold (+750,000, 750,000, 500,000, 250,000, 100,000) Note: The chart shows the trajectory for 16 of the largest banks in relation to negative rates on ordinary deposits from their NemKonto customers. The markings for the individual banks show the time of announcement(s) before first implementation (X) and times for implementation of negative interest rates at different thresholds (circle). The line between the markings shows the applicable threshold. The most recent observations are from end-March 2021. The development for Den Jyske Sparekasse ends in early 2021, when the bank merged with VestjyskBank. Source: Danmarks Nationalbank and own collection of information from the banks’ annual reports etc. The benchmark monetary policy interest rate in Den- have subsequently introduced negative deposit mark has mostly been negative since July 2012. Nega- rates, including 16 of the largest banks. At the same tive monetary policy rates were introduced by Dan- time, the thresholds have been gradually reduced, so marks Nationalbank to maintain the fixed exchange that negative interest is typically added if a house- rate of the Danish krone against the euro. However, hold customer’s deposits exceed kr. 100,000 or kr. negative interest rates influence the financial sector 250,000, see Chart 1. These thresholds apply if the and the economy more broadly.1 Whereas banks start- customer is a NemKonto customer with the bank. ed introducing negative deposit rates for corporations Otherwise, the thresholds are usually lower. The in- in early 2015 as a reaction to negative monetary policy creased use of negative deposit rates is an indication rates, they have been more reluctant to follow suit for that negative monetary policy rates are increasingly their household customers. In August 2019, Jyske Bank being transmitted through the banking sector as is announced as the first bank in Denmark that it would the case with positive rates. introduce negative deposit rates for household cus- tomers with effect from December 2019, see Chart 1. Large increase in proportion of household customers’ deposits subject to negative interest Negative deposit rates were initially applied to In many banks, the latest reductions of the thresh- deposits over kr. 750,000.2 Most banks in Denmark olds for negative interest rates entered into force at 1 See, for example, Krogstrup et al. (2020) for a discussion of the Danish experience with negative interest rates (link). 2 In connection with the first announcement, the threshold was kr. 7.5 million. However, this threshold was never implemented. ANALYSIS — DANMARKS NATIONALBANK 4 THE RESPONSE OF HOUSEHOLD CUSTOMERS TO NEGATIVE DEPOSIT RATES the beginning of 2021, see Chart 1. The reductions meant that the volume of deposits subject to nega- Large increase in share Chart 2 tive interest rates more than doubled from Decem- of deposits subject to ber 2020 to January 2021. Danmarks Nationalbank’s negative interest rates in 2021 latest survey on the prevalence of negative deposit Share of deposits, excl. pool schemes, per cent 3 rates shows that 35 per cent of household custom- 100 Lending-related ers’ deposits (excluding pool schemes) were subject 90 Positive to negative interest rates in February 2021, see Chart 80 interest rate 2. This is equal to kr. 294 billion. The share of house- 70 Zero hold customers that experience negative interest 60 interest rate rates is lower than the prevalence of negative in- 50 terest rates would immediately suggest. Supple- 40 4 Negative mentary information from 10 of the surveyed banks 30 interest rate shows that at least 20 per cent of household custom- 20 35 per cent ers paid negative deposit rates on parts of their 10 deposits in February 2021. 0 2019 2020 2021 The lower share of household customers who are Note: Lending-related deposits are demand deposits that are subject to negative deposit rates reflects that de- offset by the undrawn portion of the limit of, for example, posits are unevenly distributed. The latest figures a mortgage-like bank loan and which typically bear interest as loans. The distribution for December 2019 is for individual deposits from the end of 2019 thus not shown due to confidentiality. show that only 34 per cent of household customers Source: Danmarks Nationalbank. held deposits (excl. pool schemes) in excess of kr. 100,000, while just 17 per cent held deposits in ex- cess of kr. 250,000, see Chart 3. Nevertheless, nearly Limited share of household Chart 3 half of the total deposits were above a threshold of customers with deposits above kr. 250,000. the most widely used thresholds Share, per cent Particular effects on customer behaviour 90 may be linked to negative nominal interest rates Household customers' deposits 80 While it is a new situation that household customers’ above the threshold 70 Household customers with deposits bear negative interest, there has long been 60 deposits above the threshold a negative real return on bank deposits, in terms of 50 inflation-adjusted interest. The negative real return 40 reflects that inflation has exceeded average deposit 30 rates since 2017, see Chart 4. The same was largely 20 5 the case in the 1970s. 10 0 The real return on savings is the relevant factor for 50,000 100,000 250,000 500,000 750,000 1,500,000 Threshold, kr. the ability of household customers to plan their spending profile over time. In principle, spending Note: Deposits for adult household customers (18 years or and savings decisions should therefore be expected above). The columns show the share of household cus- to reflect the development in real returns. However, tomer’s total deposits (excl. pool schemes) that is above a separate effect on household customers’ behaviour the threshold. The dots show the share of customers in relation to the total adult Danish household customers with deposits above different thresholds. Stylised calcu- lations based on register data for household customers’ total deposits (excl. pool schemes) at year-end 2019. The share of deposits above the threshold is not directly comparable with the share of deposits with negative 3 The survey covers 90 per cent of household customers’ (employees, interest rate in Chart 2. pensioners etc.) total deposits (excl. pool schemes) in February 2021. Source: Own calculations based on data at personal level from Statistics Denmark. 4 The 10 banks together cover 72 per cent of household