SPEECH
BY GOVERNOR LARS ROHDE AT EUROPEAN
ECONOMICS AND FINANCIAL CENTRE SEMINAR
CHECK AGAINST DELIVERY
31 October 2017
A LIFE CLOSE TO THE CENTRE
Ladies and gentlemen,
I am grateful for the opportunity to address you here in the historical
Houses of Parliament.
Since the financial crisis and the subsequent economic downturn low in-
terest rates have become a global phenomenon. Today policy rates are
negative in a number of economies including the euro area. Denmark is
no exception - in fact we can be considered a leader in the field. In the
beginning of 2015, we reduced our key monetary policy rate to -0.75 per
cent.
Having operated with substantially negative policy rates for almost three
years this is a good time to reflect on what lessons we can draw. But I will
also take a look ahead. There are indications from several countries that
the rate cycle is starting to turn. In this context it is becoming increasingly
important to assess how our economies are positioned to cope with ris-
ing rates.
My remarks will take a Danish perspective and they fall in four parts. First,
I will briefly outline key features of the Danish monetary policy regime.
Based on that, I will explain how Denmark came to be a global leader in
the field of negative policy rates. Subsequently, I will discuss how banks
have coped with negative policy rates. And finally, I will turn to the im-
pact on households.
I will argue that - from a financial stability perspective - negative interest
rates have not posed significant challenges. And low interest rates have
helped supporting private sector demand in the aftermath of the financial
crisis. Going forward, higher rates will be welcome as the economic re-
covery gains momentum. But needless to say, Danish monetary policy
interest rates continue to be set with the sole objective of keeping a fixed
exchange rate between kroner and euros. We only increase rates if it is
consistent with supporting the peg.
Slide 3: Separator - Background on monetary policy regime
Slide 4: Unchanged central parity for three decades
Since 1982, Danish monetary policy has been centred on keeping the ex-
change rate fixed - initially against the D-mark and since 1999 against the
euro. The central parity has been unchanged since 1987 - that is, for
more than three decades. If the exchange rate tends to deviate from the
central parity we take consistent action. This implies that we keep the
krone within a narrow band - in practice within half a per cent from the
central parity. One immediate implication of the policy is that Danish
firms see billing in euros and kroner as substitutes.
The peg is a political decision with a clear mandate. It enjoys support
from across the political spectrum and it is well understood by market
participants.
The framework implies a clear division of responsibilities in economic pol-
icy-making. Monetary-policy interest rates are reserved for keeping the
krone stable. When setting rates we do not take into account factors such
as inflation, growth, employment and house prices. These considerations
are addressed by other economic policies. In particular, fiscal policy plays
an important role in ironing out economic fluctuations. The policy frame-
work has been the foundation for a stable macroeconomic environment
with low inflation and relatively modest business-cycle fluctuations.
Slide 5: Fixed exchange rate introduced after a period of high and vola-
tile inflation
The fixed exchange-rate regime was introduced on the basis of an unsus-
tainable macroeconomic situation in the 1970s and early 1980s. Unem-
ployment was high and there were recurrent deficits on the government
budget balance as well as on the balance of payments. Furthermore, re-
peated devaluations targeted at restoring competitiveness only resulted
in high and volatile inflation and high interest rates.
In contrast, the German Bundesbank managed to maintain low and sta-
ble inflation by the standards of that time. Since Germany was Denmark's
largest export market, it was decided to link the krone to the D-mark. As
a result, Danish inflation approached that of Germany. The same holds
for short-term as well as long-term interest rates.
Slide 6: Danish monetary-policy rates tightly linked to ECB rates
An exchange-rate peg can only be maintained if one is willing to imple-
ment the same monetary-policy stance as the anchor country. This is a
precondition in a world with international capital mobility. It implies that
most of the time, Danish monetary policy rates follow those of the ECB.
If the exchange rate tends to deviate from the central rate, we first inter-
vene in the FX market by either buying or selling kroner against foreign
currency. If this does not have the desired effect on the exchange rate the
next step is to change policy rates.
As we keep the exchange rate very stable, volatility in the FX market can-
not be detected by looking at a chart of the exchange rate. Instead it is
reflected in the response of monetary policy. For example, if there is
pressure on the krone to depreciate against the euro this will lead to a
reduction in our foreign-exchange reserves and an increase in the spread
between Danish and ECB monetary-policy rates. This was the case in the
autumn of 2008 as indicated by the chart.
Slide 7: Rising net foreign assets have reduced money-market spread
When the fixed exchange rate was introduced, Denmark was a net debt-
or. But after several years with significant surpluses on the balance of
payments we are now a creditor nation. Our net foreign assets constitute
more than 50 per cent of annual GDP. The improved net foreign-asset
position is likely to have contributed to reducing monetary-policy interest
rates in Denmark.
Until the mid-1990s, the spread between Denmark and Germany, ex-
pressed by short-term money-market rates, fluctuated strongly and it was
often several percentage points. In the subsequent period, until the out-
break of the financial crisis in 2008, the spread was very stable at a mod-
erate positive level. After a temporary widening in connection with the
financial crisis, the spread has been in negative territory for most of the
time since 2012. The reduction in the spread is likely to be associated
with the improved net foreign-asset position.
Also, whereas episodes with uncertainty in FX markets used to be reflect-
ed in downward pressure on the krone, the opposite has been the case
in recent years. This was first seen in 2011 when a number of euro-area
countries experienced a sovereign-debt crisis that led some investors to
regard the krone as a safe haven. And more recently, we experienced
strong capital inflows in early 2015 when the Swiss National Bank, SNB,
decided to discontinue the floor under the franc and the ECB subsequent-
ly announced its public-sector purchase programme.
Slide 8: Separator - Strong capital inflows led to a forceful policy re-
sponse
Slide 9: Swiss contagion to Danish FX market
The key Danish monetary-policy rate first became slightly negative in
2012. This reflected capital inflows associated with the sovereign-debt
crisis in a number of euro-area countries. But it was not until early 2015
that policy rates became substantially negative.
On 15 January 2015 the SNB announced that the floor under the
franc/euro exchange rate would be discontinued. The Swiss announce-
ment surprised financial markets resulting in increased volatility in a wide
range of financial asset markets. The Danish FX market was one of them.
In the first few hours after the Swiss announcement, the Danish exchange
rate fluctuated more than usual.
Over the following days and weeks, we experienced massive inflows of
currency. As a consequence, there was strong pressure on the exchange
rate to appreciate. The Swiss decision seems to have led some foreign
investors to look for comparable candidates to abandoning a peg. These
investors could make a substantial profit if the fixed exchange-rate policy
were to be abandoned and the krone appreciated.
So the initial push came from foreign investors. But nearly two thirds of
the increased demand for kroner in those few weeks in January and Feb-
ruary 2015 came from domestic investors, including insurance companies
and pension funds. Some of these companies wished to at least partly
insure themselves against losses in the unlikely event that the krone ap-
preciated like the Swiss franc.
Slide 10: Sharp increase in foreign-exchange reserve in 2015
In response to the inflows of capital we applied our usual measures to
defend the peg. We intervened heavily in the FX market by buying euros
and selling Danish kroner to meet the elevated demand. The sizeable FX
interventions caused a sharp increase in FX reserves by almost 15 per
cent of GDP in less than two months. As the pressure abated, the level of
FX reserves was gradually reversed over the course of 2015 to reach a
level of around 20 per cent of GDP - close to the current level.
Slide 11: Interest-rate spread to the ECB became negative
In addition, we sharply reduced monetary-policy rates. With effect from 6
February 2015 our key monetary-policy rate was reduced to a historic
low of -0.75 per cent. This put it 55 basis points below the ECB's deposit
rate.
The sequence - interventions in the FX market followed by changes in
monetary-policy rates - is independent of whether the pressure on the
krone is to appreciate or depreciate. But there is an asymmetry in the
relative importance of FX interventions versus interest-rate changes de-
pending on the direction of the pressure. In case of downward pressure
on the krone there is no limit to how much we can increase interest rates.
But interventions in the FX market are limited by the initial size of our FX
reserves.
When the pressure is towards an appreciation, things are the other way
around. In this situation there is no limit on FX interventions - we can is-
sue all the kroner that market participants are willing to absorb in order
to prevent the exchange rate from appreciating. In this situation the re-
striction is on interest rates where there is an effective lower bound. So
when the pressure is on the krone to appreciate, as was the case in early
2015, the weight on FX interventions is likely to be larger compared to
the situation where the tendency is towards depreciation.
As an additional measure to further curb capital inflows, we announced
on 30 January 2015 that the issuance of government bonds would tem-
porarily be suspended. The suspension reduced the availability of gov-
ernment bonds to investors, thereby driving down yields - similar to a QE
programme.
As expected, the announcement put immediate downward pressure on
the entire Danish yield curve relative to German yields. The re-entry of
government-bond issuance was announced in late August with effect
from 1 October. The return to the market ran smoothly. The negative
monetary-policy spread has been reduced somewhat as the ECB has
lowered its deposits rate (December 2015 and March 2016) and we in-
creased rates (January 2016).
Slide 12: Danish government-bond yields co-move strongly with German
yields
The speculative pressure on the krone was relatively short-lived. This re-
flects our decisive action as well as the high credibility of Danish mone-
tary policy. Nevertheless, Danish monetary-policy rates continue to be
very low - currently our key policy rate is at -0.65 per cent. This partly re-
flects low ECB rates with the ECB's deposit rate having been at -0.4 since
March 2016.
But in addition to this, the ECB is undertaking large-scale asset purchas-
es. This reduces the supply of bonds issued by euro-area sovereigns
available to private investors. Danish sovereign bonds stand out as an
obvious alternative to for example German bonds. This reflects that - as a
consequence of the peg - there is no exchange-rate risk for euro-area
investors. Moreover, the credit risk is low and Danish sovereign bonds
are highly liquid.
So changes in Danish sovereign-bond yields tend to track changes in
German yields. This was also the case in late 2014 when mounting expec-
tations of an ECB QE programme led to substantial declines in sovereign-
bond yields across euro-area countries. And it continued to be the case
after the launch of the ECB's Public Sector Purchase Programme in early
2015.1
Slide 13: Decline in long-term Danish yields in line with core euro-area
countries
In a recent working paper we provide more details on the way market
participants' expectations of the ECB's asset purchases have affected
Danish financial markets.2 We find that Danish sovereign-bond yields
have moved very much in line with German yields. And clearly more so
than the bonds issued by a number of countries which are members of
the euro area.
This chart shows how long-term sovereign yields in a number of coun-
tries have reacted to selected pieces of ECB communication in the six
months leading up to the start of QE. We look at the reaction of sover-
eign-bond yields in the two days following each piece of communication.
Summing over the 17 pieces of communication included in the study, we
arrive at the effects that you can see here.
In all of the 2-day windows combined, Danish 10-year sovereign-bond
yields declined by a total of 30 basis points. This is very close to the cor-
responding decline in German yields of 28 basis points. Yields in other
northern European countries declined slightly more. However, countries
in the south of Europe experienced substantially larger declines in yields.
To sum up, Danish and German bond yields are close substitutes. The
impact of QE on bond yields in the euro area also has a spillover effect on
Danish bond yields.
Slide 14: Separator - Implications for banks
Slide 15: Interest-rate margins are being squeezed
It should now be clear that our reason for having negative interest rates
is to maintain a stable exchange rate against the euro. I am happy to say
that judged by this criterion, negative rates have been highly successful.
Let me turn to the wider implications of negative policy rates. Negative
rates have affected the financial sector as well as the broader economy.
First consider the banking sector. The introduction of negative policy
rates implies that a share of banks' deposits with Danmarks Nationalbank
is currently being remunerated at a rate of -0.65 per cent. The negative
policy rate has been transmitted to money-market rates which are also
negative.
Deposits from households and firms are an important source of funding
for many banks. As banks' deposit rates have settled at 0, they have not
declined as much as short-term money-market rates. This means that
banks' deposit margins have declined.
Following the outbreak of the financial crisis, banks' lending rates did not
initially mirror money-market rates. This led to a widening of banks' lend-
ing margins which partly offset the decline in deposit margins. However,
the last few years have also witnessed a decline in lending margins.
Finally, the spread between short-term and long-term interest rates is al-
so important to banks' earnings. This reflects that banks are engaged in
maturity transformation - that is, they rely to a large extent on short-term
funding while supplying longer-term loans. The ECB's large-scale asset
purchases have worked to reduce the spread between long-term and
short-term interest rates. This tends to make maturity transformation less
profitable.
Slide 16: Strong earnings in largest Danish banks
All else equal, the squeeze in margins puts pressure on banks' profits.
Nevertheless, the largest Danish banking groups achieved their best ever
overall performance in 2016. This reflects that other factors have coun-
tered those negative effects on interest earnings.
Slide 17: Scope to rebuild interest income when interest rates start rising
Low interest rates stimulate economic activity and ease debt-servicing
costs for firms and households. This results in lower loan-impairment
charges for banks. Furthermore, banks have been able to raise fees. This
chart shows the composition of banks' income before and after the finan-
cial crisis. It illustrates that interest income has indeed been squeezed
since negative policy rates were first introduced in 2012. But total loan-
impairment charges were close to zero in 2016.
As interest rates eventually start to increase, this could lead to higher loan-
impairment charges. But as the rate cycle turns, banks are likely to restore
interest-rate spreads to levels closer to those observed prior to the finan-
cial crisis. In particular, deposit rates are likely to be kept at zero for a while
as other rates are increased. This will imply higher interest income.
Slide 18: Separator - Implications for households and firms
Slide 19: Households are largely exempt from negative interest rates on
deposits
Let me now turn to the impact of negative policy rates on households
and firms. Banks have shied away from introducing negative deposit
rates for households. This contrasts with the experience of other groups
of depositors. In particular, institutional investors such and insurance
companies and pension funds have been exposed to negative deposit
rates. This is also the case for a number of non-financial corporations.
Banks' reluctance to impose negative deposit rates on households is likely
to reflect concerns over reputational risks. The first bank to introduce neg-
ative interest rates to households may suffer a substantial loss of costum-
ers. This would not only lead to a loss of deposits. A household typically
relies on a single bank and potentially an associated mortgage bank as
their provider of financial services. This means that for a bank, the loss of a
household's deposits is likely to be associated with a loss of a wider range
of business activities. The reduction in revenues from the decline in activity
is likely to exceed the narrow benefits from lowering deposit rates.
Slide 20: Share of cash payments in Denmark is declining steadily
With negative policy rates one potential concern could be a significant
hoarding of cash. So far, we have seen no signs of this in Denmark. A po-
tential explanation is that firms and institutional investors would face sig-
nificant costs of handling, storing and insuring cash. And as I have al-
ready mentioned, households have not been met by negative deposit
rates.
Another explanation is that Danish consumers to an increasing extent
seem to prefer electronic means of payments instead of cash - either by
using credit cards or smartphones. This suggests that in Denmark the in-
convenience cost of cash is rather high. The declining use of cash sug-
gests that in our case the effective lower bound of policy rates is well be-
low the current level.
Slide 21: Stable circulation of large denomination notes
Any tendency towards using cash as a store of value should be reflected
in a pickup in the circulation of large denomination notes. Our bank note
with the highest denomination is kr. 1.000 (approx. 135 euro). The chart
confirms that we have seen no substantial pickup in the demand for cash
from households and firms.
Slide 22: Incentive to switch to cash depends on level and expected dura-
tion of negative rates
An investor considering whether or not to circumvent negative interest
rates by hoarding cash is interested in the differential between the short-
term interest rate and the zero rate that can be earned by holding cash.
But it is also important for how long this differential is expected to per-
sist. This is illustrated in the chart where the shaded areas provide a
measure of the incentive to switch to cash.
It is worth pointing out that based on this measure the incentive is signif-
icantly lower than in mid-February 2015 or a year ago. This underlines
that the lower bound for the interest rates is substantially below the cur-
rent level.
Slide 23: Mortgage rates and government-bond rates became negative
In Denmark, real estate is primarily financed by mortgage-banks issuing
mortgage bonds. This means that mortgage rates are determined in fi-
nancial markets - and that no lower bound exists. Indeed, as money-
market rates fell sharply in the beginning of 2015, short-term mortgage
rates became negative - just like short-term government bond rates.
So while households have not been exposed to negative deposit rates,
the very low mortgage rates are an example of how they have been af-
fected by the low interest-rate environment. Competition from mortgage
banks may be a factor behind the continued decline in the spread
between banks' lending and deposit rates.3
Slide 24: Indebted households consolidated heavily following the finan-
cial crisis
A large proportion of Danish households have financed their homes with
flexible-rate mortgages. And households with fixed-rate mortgages have
been able to re-mortgage into mortgages with lower rates. In such a sit-
uation households can either use the saved proceeds for additional con-
sumption or they can increase savings. Data shows that, collectively,
households have taken the opportunity to consolidate their finances dur-
ing the period of very low interest rates.
Consumption was reduced sharply when the financial crisis erupted
around 2008. But several years after the onset of the crisis, it is still affect-
ing households' consumption and saving patterns. At present, total pri-
vate consumption is slightly higher than in the beginning of 2008. This
masks substantial heterogeneity across groups of households.
All groups of households reduced their consumption immediately after
the onset of the financial crisis. But since then the consumption-to-
income ratio of net savers has returned to its pre-crisis levels. Conversely,
net borrowers - especially those with high gross debts - have consoli-
dated their finances at an increasing pace. This indicates that the adjust-
ment of households' balance sheets is a relatively long-lasting process
that has extended into the beginning of the economic recovery.4
Slide 25: Danish households are well placed to cope with higher interest
rates
This chart shows that total credit to households was roughly flat for sev-
eral years and has only recently started to pick up. Moreover, since the
financial crisis there has been a substitution of bank loans for mortgage
loans. Mortgage loans now constitute almost 80 per cent of total house-
hold debt. Mortgage debt is backed by very high-quality collateral.
Moreover, households have been substituting towards mortgages with
rates being fixed for a longer time period, including fixed-rate mortgag-
es. And importantly, in Denmark debt continues to be concentrated
among the more wealthy households.
So a key message is that Danish households as well as our banks are well
positioned for the turning rate cycle. And as we expect the economy to
strengthen further over the forecast horizon, increasing interest rates are
likely to coincide with a robust macroeconomic environment. This means
that they will help curbing sharp increases in house prices. Nevertheless,
we will continue to watch out for economic and financial risks that may
materialise. This may be relevant if we experience abrupt changes to in-
terest rates or asset prices.
Slide 26: Rising house prices - but no bubble
An environment of very low interest rates increases the risk of asset price
bubbles. And the low interest-rate environment has indeed caused real-
estate prices to rise. In particular, house prices in and around Copenha-
gen should be monitored carefully. House prices in the large cities are
generally more sensitive to interest-rate changes as a larger fraction of
the mortgages carry variable interest rates and the potential to build ad-
ditional housing is limited.
It is a concern that low interest rates and a booming economy could in-
duce households to be overly confident. Such over-confidence led to a
house-price bubble in the mid-2000s. The current increase in house prices
could at a first glance look like a repeat of such a situation. However,
when taking into account developments in fundamental factors, i.e.
mortgage rates, income, and the housing stock, there is no clear sign of
an emerging speculative house-price bubble. Not even in Copenhagen.
Slide 27: Prices of Copenhagen apartments not out of line with other
large cities
This conclusion is corroborated by an international comparison. While
house prices have indeed risen substantially in the Copenhagen area,
their sustainability cannot be assessed by looking at growth rates alone.
Also their level relative to income must be taken into account. This chart
illustrates that compared to other large European cities, house prices in
Copenhagen, when measured relative to GDP per capita, are not out of
line with those cities. And unlike the other cities in the chart, they are not
above their pre-crisis peak.
But the absence of a speculative bubble does not mean that house prices
cannot fall. An unexpected increase in the mortgage rates poses a signifi-
cant risk to households' balance sheets which would dampen house pric-
es. As we have previously experienced, such losses could challenge mac-
roeconomic and financial stability if households are not sufficiently ro-
bust.
Slide 28: Legal and technical challenges have been addressed
Let me conclude with some remarks on the legal and technical aspects of
negative interest rates. In February 2015 the Minister for Business and
Growth set up a task force to identify potential issues in relation to nega-
tive rates of interest on mortgage loans. In a report from April 2015, the
task force concluded that negative interest rates do not cause significant
problems in relation to adjustable-rate loans. But they may constitute a
challenge in relation to loans that are based on variable-rate bonds.
At the same time, the task force assessed that there is no immediate need
for legislation in this area. The individual mortgage banks are free to
choose the model that best matches their business. As a result, they have
applied different models for handling negative rates. The borrowers have
received the negative interest either as a direct disbursement, as a reduc-
tion of the outstanding debt or as a capital gain.
As regards taxation of interest rates, in February 2015 the Danish tax au-
thorities, SKAT, issued guidelines describing the taxation and deductibil-
ity of negative interest: Interest income in the form of a negative rate of
interest is taxable for the borrower, while interest costs in the form of a
negative rate of interest are deductible for the lender. In addition, the
Danish parliament has adopted adjustments to a number of laws regard-
ing the tax treatment of negative interest.
Slide 29: Thank you!
So let me conclude. Since the outbreak of the financial crisis a number of
large central banks have resorted to unconventional monetary policies.
This has substantially impacted the economic and financial conditions of
Denmark and other small open economies. By doing so, it has posed a
number of challenges and led us into unchartered territory. But it is im-
portant for me to stress that the spill-overs arising from the policies of
large central banks have been manageable. This has been the case for us
at Danmarks Nationalbank as well as for our commercial banks and for
firms and households.
Looking ahead, the rate cycle is starting to turn. This is likely to coincide
with a further strengthening of the economy, and in Denmark banks as
well as firms and households are well positioned to coping with higher
rates. In fact, higher rates will be a welcome contribution to curbing
house prices as the recovery gains momentum. But needless to say, we
will continue to watch out for potential risks to macroeconomic as well as
financial stability. A stable macroeconomic environment supported by a
robust financial sector is key to our overall well-being as a society.
Thank you for your attention!
DANMARKS
NATIONALBANK
A LIFE CLOSE TO THE CENTRE
​Lars Rohde, Chairman of the Board of Governors, 31 October 2017
Agenda
1. Background on monetary
policy regime
2. Negative policy rates in
Denmark
3. Implications for banks
4. Implications for
households
​Background on
monetary policy regime
Unchanged central parity
for three decades
Kroner per euro
6.0
6.5
7.0
7.5
8.0
8.5
9.0
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Market rate Central rate Fluctuation limits (+/- 2.25 per cent)
Fixed exchange rate introduced after a
period of high and volatile inflation
Per cent, year-on-year
18
16
1982: Exchange-rate peg
14
12
10
8
Danish inflation
6
German inflation
Euro-area inflation
4
2
0
-2
Danish monetary-policy rates tightly
linked to ECB rates
Per cent
6
5
Danmarks Nationalbank
4
3
ECB
2
1
0
-1
-2
Rising net foreign assets have reduced
money market spread
Interest rate spread, per cent
Net foreign assets, per cent of GDP
6 60
5 50
4 40
Money market spread
3 30
2 20
1 10
0 0
-1 -10
Net foreign assets (right-hand axis)
-2 -20
-3 -30
-4 -40
-5 -50
​Strong capital inflows
led to a forceful policy
response
Swiss contagion to Danish FX market
15 2015
January
Swiss
Kroner per euro
Bid-ask spread, pips
announcement
7.430 25
Widened bid-ask spread
(right-hand axis)
7.432 20
7.434 15
7.436 10
7.438 5
Increased exchange-rate volatility
7.440 0
09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00
Sharp increase in foreign exchange
reserve in 2015
Per cent of GDP
40
35
30
25
20
15
10
5
0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
​Note: In per cent of nominal GDP at yearly frequency. GDP for 2017 is from Danmarks Nationalbank's projection.
​Source: Danmarks Nationalbank and Statistics Denmark.
Interest rate spread to the ECB
became negative
Interest rate spread, percentage points
1.0
0.8
Sale of FX
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
Purchase of FX
-0.8
-1.0
Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17
Monetary policy spread Money market spread
​Note: Shaded quarters illustrate quarters where Danmarks Nationalbank intervened for more than kr. 5 billion (net). Money market spread is the spread between 1
month OIS rates (i.e. EONIA- and CITA-swaps). Monetary policy spread is the spread between Danmark Nationalbank's CD rate and the ECB's deposit rate.
​Source: Rio, Thomson Reuters Datastream, Danmarks Nationalbank and own calculations.
Danish government bond yields
co-move strongly with German yields
Per cent
2.5
Suspension of
government
bond sales
2.0
1.5
1.0
Denmark
0.5
0.0
Germany
-0.5
Decline in long-term Danish yields in line
with core euro area countries
Basis points decline in 9-year government bond yields
120
Core Periphery
Floater
100
80
60
40
20
0
UK
Italy
Spain
France
Finland
Sweden
Portugal
Germany
Denmark
Switzerland
Netherlands
​Implications for banks
Interest rate margins are being squeezed
Per cent
Per cent
6 4
Term spread
5
3
4
Lending margin
2
3
2 1
1
0
0
Deposit margin
-1
-1
-2 -2
97 99 01 03 05 07 09 11 13 15 17
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
​Note: The lending margin is calculated as the difference between the average lending rate and the T/N money market rate. The deposit margin is the difference
between the T/N money market rate and the average deposit rate. Lending rates and deposit rates are based on data for Danske Bank, Nykredit, Jyske Bank and
Sydbank. The term spread is calculated as the difference between 10-year government bond yield and the T/N money market rate. Data are monthly averages.
​Source: Danmarks Nationalbank and Nordea Analytics.
Strong earnings in largest Danish banks
Earnings of largest Danish banks
Kr. billion
30
25
20
15
10
5
0
-5
05 06 07 08 09 10 11 12 13 14 15 16
​Note: The chart shows financial statements for the Danske Bank, Nykredit, Jyske Bank and Sydbank groups.
​Source: Danish Financial Supervisory Authority and own calculations.
Scope to rebuild interest income when
interest rates start rising
Kr. billion
75
After the
Up to the
financial crisis
financial crisis
60
Administration margins
45
Fees, net
30
Interest
15
income,
net
0
​Implications for
households
Households are largely exempt from
negative interest rates on deposits
Rate of interest on bank deposits
Percentage share
100
Other types of
deposits
75
50
Demand
deposits excl.
lending-related
deposits
25
0
Non-financial corporations Insurance and pension companies Wage earners, pensioners, etc.
Negative Zero Positive
Share of cash payments in Denmark
is declining steadily
Per cent
100
2016: 20 per cent
90
80
Cash payments
70
60
50
40
Cheque payments
30
Card payments
20
10
0
Stable circulation
of large denomination notes
Kr. billion
53
Circulation of 500- and 1,000 krone notes
51
49
4