the ecb became negative. when the ecb cut its deposit rate even further in july 2012 we followed suit, this time taking our marginal deposit rate ( for certificates of deposits which have a maturity of one week ) to negative territory at – 0. 2 per cent. by january 2013 we increased the negative rate to – 0. 1 per cent following some reversal of the previous inflows. episodes of negative market interest rates are rare, but they happen. there are examples of negative rates for t - bills in japan in the 1990s and recently for short term money market bis central bankers ’ speeches rates in germany, switzerland and denmark. episodes of negative policy rates are very rare. so what have we learned? first, the transmission to market rates has worked well. money - market rates fell and the currency weakened – as intended – probably because the remaining uncertainty about our readiness to introduce negative rates vanished. subsequently, upwards currency pressure also faded due to improvements in the debt financing situation of vulnerable euro area countries. the volume of money market transactions has declined, but the money market still functions well. we were careful in preparing market participants well in advance that moving towards negative deposit rates was an option and explained how the system, if invoked, would work. second, spill over, if any, to the retail rates of private banks has been very limited. the annual costs associated with a negative policy rate of – 0. 1 per cent compares to 0, 013 per cent of private bank lending volume, or in other words 1. 3 basis - points. when private banks have positive net positions, deposits, at the central bank, lower policy rates will affect their earnings. the marginal impact is not stronger by moving into negative territory than reducing a positive rate to a level less positive. third, neither private banks themselves nor their customers have increased their cash holdings. for the former large amounts of cash holdings are probably too costly as compared to negative policy rates of such a low level. for customers, the incentive to hold more cash has not been present, since banks have not introduced negative deposit rates for customers. can our experience be copied? we do not take positions on the policy stance of other central banks and we are careful not to make parallels to very different situations. our case is specific, a small open economy and a very explicit exchange rate target. our concern was not to directly target inflation or spur lending to the real economy. 2. the current state of the banking sector the danish banking sector – like banking

per callesen : current economic and financial issues affecting denmark speech by mr per callesen, governor of the national bank of denmark, at the international capital market association ’ s ( icma ) annual general meeting and conference 2013, copenhagen, 24 may 2013. * * * thank you for the invitation. as this important event is held in copenhagen, i expect you would appreciate reflections on some of our domestic issues and a few international issues seen from our perspective. i will try to cover : our current economic situation and the experience of negative policy interest rates the state of our banking sector, now soon 5 years after the outbreak of the financial crisis perspectives on the european banking union ftt 1. current economic situation and negative interest rates the fundamentals of the danish economy are by and large at par with most other northwestern european economies. we have very large levels of private savings, large current account surplus, moderate public sector deficit, low inflation, moderate levels of unemployment and extremely low interest rates. growth is low for both structural and cyclical reasons. structurally, the working age population is no longer increasing and productivity growth is weak. for a number of years even weaker than in many peer countries. cyclically, we are still in the aftermath of a strong housing and construction bubble which led to overheating in 2006 – 07. fiscal policy is over the years 2011 – 2013 moderately contractionary, tightening the structural balance by 0. 5 per cent of gdp annually after major stimulus in 2009 and 2010. high savings and low real investments imply that denmark is increasingly becoming a creditor nation. that was not the case just going back 5 years. now the international investment position is net assets of 35 per cent of gdp and net annual revenues from the return on assets are some 3 – 4 per cent of gdp. this, together with moderate pressures from net capital inflows, has provided some currency challenges. we have successfully run a fixed exchange rate policy for 30 years, first against the deutsche - mark, later against the euro. we were used to have moderate interest rate spreads and in some cases had to raise policy rates more significantly to counter negative currency pressures, which tend to come in recessions, such as in 1993, 2000 and 2008. in recent years this has reversed. the challenge has been to avoid currency appreciation. our policy remedies are a combination of currency intervention and interest rate adjustments. in most cases we have simply shadowed decisions taken by the ecb. in late 2011 our policy spreads towards