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Maybe Negative Rates Aren't As Scary As Investors Think

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Maybe Negative Rates Aren't As Scary As Investors Think

For some investors, negative interest rates have a certain stigma of doom and gloom attached to them — but it shouldn't be, at least according to Denmark.

Interest rates have been negative in Denmark for a longer period than any other country on the planet, and the country's head of the bankers' association has some interesting commentary.

Interest rates in Denmark have been mostly negative dating back to mid-2012, and most economists expect this to continue through at least 2018. The country's central bank only makes use monetary policy to defend the nation's currency, the krone, to the euro.

According to Bloomberg, Ulrik Nødgaard, head of the Danish Bankers Association and former head of the country's financial regulator, pointed out that banks suffer fewer impairments when rates are extremely low. In addition, ultra-low rates encouraged households to refinance their mortgages, which generates additional fees for banks.

Related Link: Fed's Rosengren Further Explains Disagreement With Fed's Decision Not To Raise Rates

Naturally it also helps when the industry cuts their own costs internally.

"It is comforting that, even in an environment with negative interest rates, earnings are at a reasonable level," Nødgaard said in a Bloomberg interview in Copenhagen. "Not an impressive level, but at a reasonable level."

Nødgaard further believes it is "plausible" Danish banks will survive the entire negative rate cycle without passing on costs to their retail clients. After all, 2015 was the most profitable year for the country's lenders since 2008.

Meanwhile, there are no signs that Danish banks will pass on negative rates to retail clients, even in the negative interest rate environment that will continue for years.

"The fact that we are actually able to earn money even in this environment is one factor, and the other factor is what will be the customer reaction," Nødgaard said.

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