European banks are twisting traditional economics of lending and borrowing to cope with years of sub-zero rates. With more easing expected, the lenders are only going to get more desperate to preserve their profits.
Traditional economics of lending and borrowing says you pay to borrow money and get paid to lend. But European banks are turning banking on its head.
A Danish bank is effectively paying home buyers to borrow money. Jyske Bank, which is Denmark's third-largest lender, is handing out 10-year loans at an annual rate of -0.5% — the world's first negative interest mortgage. Nordea Bank, another Nordic bank, is offering 20-year mortgages at 0%.
Jyske has also launched negative interest rates on customer deposits. Customers with balances over 7.5 million Danish krone ($1.1 million, €1 million) will have to pay 0.6% interest annually. The Danish bank followed Swiss banks UBS and Credit Suisse, which have also announced plans to charge some wealthy customers.
Lenders had till now refrained from charging retail customers for deposits, fearing that it could prompt people to hoard cash.
"We introduced negative interest rates for corporate customers three years ago. We thought it was a temporary thing, but now it seems to become permanent," Jyske Chief Executive Anders Dam said. "Personal deposits are rising by a couple of billion each quarter…The personal deposits yield us a big loss, so we had to act."
Where are the yields?
European banks have been struggling to boost profits in an ultralow interest rate environment for years now. They have cut costs, raised customer fees and reduced dependence on interest income by boosting earnings from services such as trading and insurance to remain in the black.
The Stoxx Europe 600 banks index, which tracks the performance of Europe's biggest lenders, has fallen to its lowest level since the 2008-09 global financial crisis.
Falling bond yields — especially long-term bond yields — in recent months have added to their woes. Banks typically make a large chunk of their money by borrowing money for a short term and lending it for a longer term at a higher rate. But with hardly any difference between yields on short-term and long-term debt — referred to as a flat yield curve — the lenders are finding it difficult to earn money.
Germany, Denmark and Switzerland have seen yields on all their sovereign bonds, including longer-term debt, plummet below 0% as investors dash for safe-haven assets amid growing fears of a global slowdown.
"Banks are finding it harder to make money on their assets and that in turn is forcing them to keep their costs as low as possible," Andrew Kenningham, chief Europe economist at Capital Economics, told DW. "It's most likely that yields remain very low and certainly remain negative in those three economies for government bonds for potentially several years. So, I think that's another thing which is probably on the minds of the managers of the banks."
With banks in Denmark and Switzerland taking a lead in charging customers for cash deposits, German lenders are expected to follow suit.
German banks are struggling to boost margins in an industry crowded with more than 1600 lenders. They have also been weighed down by European Central Bank's sub-zero interest rates, which essentially means they must pay the central bank to park their funds with it.
Negative yields on even long-term sovereign bonds have made it even more difficult for them to make money. With the ECB expected to cut its interest rate further, there is no respite in sight for the lenders.
"There is of course a chance that German banks will charge negative yields to deal with the current environment. But there are some legal hurdles," Ekkehardt Bauer, senior manager at German consultancy zeb, told DW. "Of course, the banks can say your current account costs us more, so we are increasing our current account fees. But to really implement negative yield on current accounts there are legal issues."
Prospects of negative interest rates for retail customers has caused a stir in the country, known for its for financial prudence. The German government has sounded out a possible ban on penalty interest for small savers.
The Ministry of Finance has initiated a review "to determine whether it is legally possible for the Federal Government to protect small savers from such negative interest rates," German Finance Minister Olaf Scholz told a local media outlet.