Chartering the Uncharted: Negative Interest Rates and Euro-banking

Acuity Knowledge Partners
5 min readSep 14, 2023


The concept of negative interest rates was hardly used in banking parlance until 2009, when Sweden’s Riksbank, regarded as the world’s oldest central bank, brought the concept into the limelight by lowering the repo rate to -0.1% to revive the country’s growth2. Although the experiment was short-lived, several advanced economies — Denmark, Switzerland, Japan and the European Central Bank (ECB) — later followed a negative interest rate policy (NIRP)3.

Conventional banks would incentivise savers for giving up the utility value of money in the interim and subsequently charge borrowers for the utility value of such money they lend. However, NIRP goes against this equilibrium.

Why a ‘negative interest rate’?

Despite broader arguments for and against an NIRP from central bankers, economists and market operators, a number of underlying factors have accelerated its adoption in advanced economies. Whether used by Japan as a last resort for reviving long-lost growth, Sweden to target inflation, Denmark to stabilise the exchange rate or the EU to stimulate stagnant growth, the potential outcomes of adopting an NIRP are many.

On most occasions that conventional policy tools have run out of steam and been unable to stimulate demand in a downturn, central banks have resorted to pushing near-zero short-term policy rates (real rates) below the zero bound. This has mainly resulted in increased lending by banks, anticipating better returns and simultaneously persuading borrowers (households and firms) to lock in low rates on new loans or refinance legacy debt. Real equilibrium rates have been declining in advanced economies over the past two decades, for these reasons.

The ECB ventured into the uncharted territory of NIRP in 2014 by lowering the deposit facility rate (DFR) to -0.1%4. Its cautious approach to NIRP over the next six years saw the DFR dropping further to -0.5%5. The negative DFR essentially imposed a tax on reserve cash held by banks with their respective central banks under the Eurosystema.

NIRP effect on Euro-banking





  • EU banks’ deposits spiked, growing at a 2.5% CAGR over 2014–196. The EU household savings rateb reached its highest in 2Q 20207.
  • Banks continue to delay passing on statutory costs to general retail depositors (i.e., households)4.
  • As interest rates become more negative, the pass-through effect on deposits held by corporates (non-financial corporations) intensified, as evidenced in Germany, Luxembourg and the Netherlands4.
  • Pressure keeps mounting on banks’ asset and liability management (ALM).
  • The ECB’s appetite for a lower-for-longer policy rate to shift to higher negative-rated EU savings over time. Larger banks to be more resistant to passing through costs to retail depositors.
  • Negative-rated household deposit growth over time to pose higher debasing risk to banks’ stable funding.
  • To compensate for low core margins, banks are most likely to pursue unconventional riskier avenues (e.g., trading) to prop up profitability.
  • Denmark, the country adopting NIRP the longest (since 2012), applied negative rates on general depositors for the first time in 2H 2019, led by Jyske Bank.


  • EU total loans increased at a 2.7% CAGR over 2014–196. Housing loan growth remained strong.
  • The ECB’s negative DFR contributed to an increase in lending volumes and a decrease in lending rates across loan categories8.
  • Banks’ overall terms and conditions on new loans to enterprises continued to tighten, driven entirely by riskier non-financial corporation loans8.
  • Generally low level of interest rates to increase appetite for new and refinancing loans in the housing segment.
  • Impacted by the pandemic, banks’ tighter credit-control measures to continue in the near term.
  • The ECB’s asset purchase programme and liquidity support measures to significantly ease banking-sector credit risk.
  • Going a step further, Jyske Bank, the third-largest lender in Denmark, became the world’s first to offer a housing loan option at 0.5% carrying a 10-year term in 2H 20199. The offer was ably supported by Denmark’s uniquely gilt-edged mortgage bond market carrying an AAA rating10.
  • EU banks’ loan-to-deposit marginc dropped to 2% in 2019 from 2.6% in 2012.
  • The Eurozone remains the lowest-ranking banking region in terms of ROCE11. The cost-to-income and cost-to-asset ratios of EU banks remain above their 10-year averages12.
  • Contrary to popular notion, NIRP has a negligible effect on banks’ profitability. Borrower de-risking and loss-provision reductions are considered to be offsetting factors.
  • NIRP continues to fast-track banks’ cost optimisation (headcount and branch reductions) and digitalisation agendas for better ROCE.
  • Larger banks pursuing inorganic growth strategies are a viable likelihood.
  • NIRP-ledimpairment improvements, a significant decline in opex, and a focused approach to adjust business models consistently have led to higher profitability for Danish banks.

The ECB’s leniency towards the current negative DFR and accommodative fiscal policy support, aggravated by the pandemic (i.e., the largest-ever EU budgetary stimulus totalling EUR1.8tn14), affirm the EU’s medium-term commitment to reviving the region’s subdued economic activity13. Amid this protracted weaker EU demand, the incentive for the Euro-banking industry to pursue business remodelling agendas to reduce conventional opex through outsourcing, automation and/or hybrid solutions is likely to remain compelling for the foreseeable future. This would eventually result in banks and other financial institutions remaining more operationally agile and lean on cost to deliver better returns for a wider range of stakeholders.

How Acuity Knowledge Partners can help

Acuity Knowledge Partners has extensive expertise in providing services to global banks and financial institutions in Europe, the US and the Middle East.

Our Commercial Lending team is experienced in remotely managing the banks’/financial institutions’ credit portfolios, providing support with covenant monitoring, credit facility renewal, financial spreadsheets, risk rating modules, sensitised scenario modelling, tailor-made periodic reporting and presentations. These services help our clients fast-track cost-optimisation and process re-vitalisation strategies to remain flexible in the marketplace.

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