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World record in negative rates has bankers testing no-man's land

[COPENHAGEN] After more than seven years of negative rates, some of Denmark's biggest banks are resorting to uncharted territory in order to cope with the extreme monetary regime.

At Sydbank A/S, Chief Executive Officer Karen Frosig said on Wednesday she's going to need to pass on negative rates to a record number of retail depositors, and possibly even cut the rate on their accounts below the central bank's benchmark of minus 0.75 per cent.

Sharing the pain of negative rates with retail depositors, once taboo, is fast becoming the "market standard" in Denmark, Ms Frosig said in an interview on Wednesday. She spoke after announcing cost cuts that will hit headcount, as life below zero makes it increasingly difficult to run a bank.

No other country has lived with negative rates as long as Denmark. At Jyske Bank A/S, the expectation is that the policy may last another eight years. It's already led to dramatic adjustments in the banking world, with more lenders relying on other revenue streams besides traditional lending to stay profitable. Banks that have mortgage units are the lucky ones, as borrowers respond to falling rates by refinancing, incurring fees in the process.

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"If you'd asked me five years ago whether we would have negative rates on deposits in Denmark, I wouldn't have been able to imagine reaching that point," Ms Frosig said. Now, she says she's "stopped guaranteeing anything."

Danish bankers are at the front line of a monetary experiment that's drawing an increasing number of skeptics. In Sweden, the Riksbank has made clear it's eager to exit the policy after almost half a decade below zero. In Denmark, the central bank uses negative rates for the sole purpose of defending the krone's peg to the euro.

Birger Nielsen, chief financial officer at Jyske, says how far the bank goes in requiring retail clients to accept negative rates depends on the bigger picture.

"It depends on the market development," Mr Nielsen said in an interview. "We've historically had a positive margin, which now has turned into a negative margin, and we need to reestablish the profitability on deposits. Whether we will go lower, hopefully not... But we monitor it closely on a continuous basis."

Shares in Jyske, Denmark's second-biggest listed bank, slumped 5.4 per cent on Wednesday after it reported earnings that were clearly pummeled by long-term negative rates. Sydbank lost 1.6 per cent.

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