Danske Bank A/S, Denmark’s biggest lender does not want the excess cash of corporates held with it and it is telling its corporate clients to think hard about what to do with their excess cash before Dec. 31.
Denmark still has a few surprises up its sleeve that show how such a monetary regime works in practice, after a world-record-setting half decade of negative interest rates. Danske is struggling to deal with near-record amounts of deposits though corporate clients need to pay to place their savings with the bank.
Second-quarter results show that at the end of June, the bank’s deposits are 914 billion kroner ($145 billion) and have risen 11 percent over the past 21 months. While declining to provide any further details, Danske said it’s encouraging clients to place excess cash in other products offered by the bank.
With savings growing 17 percent to 265 billion kroner, corporate and institutional clients have the biggest placement need. That’s a quarter of Danske’s total deposits. The cost of complying with Denmark’s strict liquidity rules is added to by the cash.
Managing liquidity ratios is a difficult balancing act that means not all deposits are welcome, says Christoffer Mollenbach, Danske’s treasurer. “We have to manage across the ratios, some of which are contradictory” and so “banks want to avoid large last-minute transactions,” he said in an interview in Copenhagen.
In order to ensure lenders can survive a market freeze, the so-called liquidity coverage ratio has been placed. But recently, distinction between cash that firms keep on hand to run their business on a day-to-day basis, and non-operational deposits, is being asked to be maintained by the banks, the regulators have directed. With the argument that such deposits are more likely to be withdrawn if times get tough, the latter of those two categories generates a bigger liquidity buffer requirement.
Compared to the rest of the European Union, Denmark imposes stricter liquidity requirements. Compared with the one month that applies elsewhere in the EU, banks in the country need to prove they can withstand a three-month funding drought. After extending the duration of its short-term funding and reducing the need for liquid assets, Danske had a liquidity buffer of 603 billion kroner at the end of June.
Already, the bank has felt the potential need to turn away clients last year. Mollenbach said that the bank got “a number of requests to take very sizable deposits.”. Before ultimately deciding they were ready to accept the cash, senior management debated what to do. But the placement demand wasn’t as great as initially expected in the end. When money markets are volatile, excess deposits are particularly hard to deal with.
Banks’ “ability to absorb changes in customer behavior is becoming more limited, and the year-end pricing is an example of that” is one of the unintended consequences of stricter liquidity requirements, Mollenbach says.
“We generally saw money-market prices significantly distorted over year-end,” he said. Such last-minute transactions are “the kind of thing Danske, and most other banks, would like to avoid,” he said.
According to a December report by the European Banking Authority, which looked at 2015 numbers, excess client cash is the biggest drag on bank liquidity coverage ratios. The EBA found that “the greatest negative impact” was exerted by non-operational deposits, which include short-term unsecured interbank funding.
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“As we move closer to the fourth quarter, we normally start to advise customers regarding their options on excess liquidity in preparation for the year end,” said Jakob Groot, who heads fixed income, currencies and commodities at Danske. “This will be even more important this year, given the volatility we saw at last year-end in deposit rates.”
(Adapted from Bloomberg)