28 November 2023
Higher interest rates are currently strengthening the earnings of banks, which are shaping up to be the highest in many years. The increase in earnings is primarily due to deposit rates rising significantly less than money market interest rates. There is considerable uncertainty about earnings from deposits in the longer term, but at the moment the incentive to raise deposit rates is limited.
"The banks already had a large bank deposit surplus, and incentives to raise deposit rates is further limited by the fact that Danish households have so far only reacted to a modest extent to the low deposit rates," says Peter E. Storgaard, Director and Head of Financial Stability at Danmarks Nationalbank.
If lending rates remain at a higher level, the pressure on borrowers will be maintained, and more will experience problems that may lead to losses in Danish credit institutions. This is the case, for example, in the commercial real estate market, where interest rate increases have increased both the financial costs for firms and the risk of a decline in the prices of the properties pledged as collateral for the firms' loans.
"Several real estate companies are already feeling the pressure from the higher interest rate environment, and more will be challenged if earnings decline further. This may happen, for example, if there is an economic slowdown combined with a decrease in demand for rental properties," says Peter E. Storgaard.
Institutions should exercise prudence in their capital planning, for example due to uncertainty about future earnings, including contributions from deposits and impairment charges.
Every six months, Danmarks Nationalbank publishes its analysis Financial stability, which presents Danmarks Nationalbank's assessments and recommendations regarding financial stability in Denmark. The latest analysis is available at nationalbanken.dk.
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