##marks nationalbank tends to track that of the ecb very closely. in denmark, we have had negative rates for some years now. so far, their implications have been far less exciting or radical than some might have expected before entering negative territory. basically, negative interest rates have just been a continuation of low rates, with strong passthrough to money market rates. however, the financial sector has had to adapt to the new environment. negative interest rates have put pressure on banks'earnings slide 5 : households are exempt from negative deposit rates first of all, negative rates have challenged danish banks'business models. net interest margins and thereby net interest income have been squeezed. the introduction of negative policy rates has meant that a significant share of bank deposits with danmarks nationalbank is currently being remunerated at a rate of - 0. 65 per cent. while lending rates have mirrored the fall in monetary policy rates, banks have been reluctant to page 3 of 9 introduce negative deposit rates on household deposits. this likely reflects concerns about reputational risks. in contrast, negative rates have been more widely introduced on corporate deposits. the spread between short term and long term interest rates is also important for banks ’ maturity transformation business. the ecb ’ s large scale asset purchases have worked to reduce the spread between long term and short term interest rates. this has made such efforts less profitable for banks. these declining margins have lowered banks'net interest income significantly. the largest banks have so far been able to compensate by expanding into new business areas, such as wealth management, and by adjusting their fees. smaller banks typically rely more heavily on deposit funding. for them, the adjustment has been much more difficult. on the positive side, negative interest rates have contributed to a favourable macroeconomic climate driving loan impairment charges to a minimum. the effect from very low impairment charges is one of the main explanations for the record - high results booked by the largest danish banks in recent years. these results have been achieved despite the pressure from falling interest margins. increased resilience of banks should lower the expected return on equity slide 6 : more resilience and low interest rate : required return on bank equity can be lowered with the strengthening of profits in recent years, danish banks have clearly put the financial crisis behind them. equally important, we now have a financial sector that is much more robust than prior to the crisis. the financial crisis revealed that many financial institutions were insufficiently capitalised. as a result, some of them were not

lars rohde : the european crisis and the development of the european union speech by mr lars rohde, governor of the national bank of denmark, at the european affairs committee ’ s consultation : “ the european crisis and the development of the european union ”, former upper chamber of the danish parliament, copenhagen, 26 february 2013. * * * thank you for inviting me to speak here today. the eu member states have been severely affected by the financial crisis and then the sovereign debt crisis. the recession is now in its fifth year. many measures have been taken to contain the crisis, and more are in the pipeline. being a small, open economy, denmark is highly vulnerable to developments in the eu. we participate in many community efforts, but not in the monetary union. we have opted out, but at the same time the krone is tied closely to the euro. the purpose of keeping the krone stable against the euro is to avoid exchange - rate uncertainty – which is very important to an economy such as the danish one, with exports accounting for almost half of the gross domestic product. at the same time, inflation and inflation expectations are anchored to an area pursuing stability - oriented economic policies with low and stable inflation. the fixedexchange - rate policy means that fiscal policy is the instrument at our disposal to stabilise the economy. this arrangement has served us well for 30 years. denmark ’ s economic policy enjoys considerable credibility – also in the financial markets. this is why we have for some time been – and indeed, we are still – seen as a safe haven for international investors. this has resulted in historically low interest rates. despite the most recent increase, danmarks nationalbank ’ s deposit rate is still negative. the low level of interest rates has mitigated the real economic consequences of the financial crisis. but at some point interest rates will normalise. the stability of the anchor currency – i. e. of the euro area – is important to the danish economy. the political system in a non - euro area eu member state such as denmark must perform a balancing act – how far should we go in terms of participation? this question was topical in relation to the issue of closer fiscal cooperation, as it is in the current process towards a banking union. in the early 1990s, the european foreign - exchange market came under strong speculative pressure and one currency after the other came under attack. the crisis culminated in 1993 with speculation against the exchange - rate mechanism, erm