Danske Bank A/S is telling corporate clients to think hard aboutwhat to do with their excess cash before Dec. 31, because Denmark'sbiggest lender doesn't want it in deposit accounts.

After a world-record-setting half decade of negative interestrates, Denmark still has a few surprises up its sleeve that showhow such a monetary regime works in practice. Though corporateclients need to pay to place their savings with the bank, Danske isstruggling to deal with near-record amounts of deposits.

The bank's deposits have risen 11% over the past 21 months,reaching 914 billion kroner ($145 billion) at the end of June(excluding repurchase agreements), second-quarter results show.Danske said that it's encouraging clients to place excess cash inother products offered by the bank, but declined to provide moredetails.

Corporate and institutional clients have the biggest placementneed, with savings growing 17% to 265 billion kroner. That's aquarter of Danske's total deposits. The cash adds to the cost ofcomplying with Denmark's strict liquidity rules.

Christoffer Mollenbach, Danske's treasurer, says managingliquidity ratios is a difficult balancing act that means not alldeposits are welcome. “We have to manage across the ratios, some ofwhich are contradictory” and so “banks want to avoid largelast-minute transactions,” he said in an interview inCopenhagen.

The so-called liquidity coverage ratio is designed to ensurelenders can survive a market freeze. But regulators recently beganrequiring banks to distinguish between cash that firms keep on handto run their business on a day-to-day basis, and non-operationaldeposits. The latter of those two categories generates a biggerliquidity buffer requirement, the argument being that such depositsare more likely to be withdrawn if times get tough.

Denmark imposes stricter liquidity requirements than the rest ofthe European Union. Banks in the country need to prove they canwithstand a three-month funding drought, compared with the onemonth that applies elsewhere in the EU. Danske had a liquiditybuffer of 603 billion kroner at the end of June, after extendingthe duration of its short-term funding and reducing the need forliquid assets.

Already last year, Danske found itself potentially needing toturn clients away. The bank got “a number of requests to take verysizable deposits,” Mollenbach said. Senior management debated whatto do, before ultimately deciding they were ready to accept thecash. In the end, the placement demand wasn't as great as initiallyexpected. Excess deposits are particularly hard to deal with whenmoney markets are volatile, as they were at the end of lastyear.

Mollenbach says one of the unintended consequences of stricterliquidity requirements is that banks' “ability to absorb changes incustomer behavior is becoming more limited, and the year-endpricing is an example of that.”

“We generally saw money-market prices significantly distortedover year-end,” he said. Such last-minute transactions are “thekind of thing Danske, and most other banks, would like to avoid,”he said.

Excess client cash is the biggest drag on bank liquiditycoverage ratios, according to a December report by the EuropeanBanking Authority, which looked at 2015 numbers. Non-operationaldeposits, which include short-term unsecured interbankfunding, had “the greatest negative impact,” the EBA found.

Denmark's combination of stricter liquidity rules and negativerates, which most economists predict will last into 2019, isproving a challenging cocktail for the country's banks. But Danskehas shown that lenders can still perform very well in such anenvironment. It delivered record profits in 2016 and its shareshave gained about 16% this year, compared with the roughly 10 %increase in European financial stocks.

Cash and cash equivalents are testing pre-crisis levels at someof the Nordic region's biggest companies, including giants such asNovo Nordisk and Volvo.

“As we move closer to the fourth quarter, we normally start toadvise customers regarding their options on excess liquidity inpreparation for the year end,” said Jakob Groot, who heads fixedincome, currencies and commodities at Danske. “This will be evenmore important this year, given the volatility we saw at lastyear-end in deposit rates.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.