State Street Corp. and Bank of New York Mellon Corp., two of theworld's biggest custody banks, will charge depositors to holdDanish kroner and Swiss francs as customers seek refuge from thecrisis-stricken euro.

State Street will apply a negative interest rate of 0.75 percentannually to krone deposits starting Nov. 1, with a separate chargefor francs, according to a note to clients last week. That meansmoney managers, insurance companies and pension funds must pay thebank to hold their cash. BNY Mellon started charging for kronedeposits last month, a person with knowledge of the matter said.The lender isn't charging for francs.

Denmark and Switzerland have cut interest rates close to orbelow zero to keep the krone and franc from rising as investorsflee the euro for safer havens, reflecting concern that thecurrency may break up. While negative rates may drive off somecustomers, global lenders want to restore the profit margin betweenwhat they pay for deposits and what they earn on investments.

“It does look customer-unfriendly, but since State Street'smainly dealing with institutions I would think that people would bemore understanding,” said Richard Herring, a professor ofinternational banking at the University of Pennsylvania. “Theoverall problem is the distortions that are caused by the monetarypolicies that are being pursued in the major countries.”

Negative rates are a symptom of Europe's debt crisis, which hasdisrupted savings and lending patterns across the globe asdepositors and bankers sought safety in case one or more nationsstopped using the euro as their currency. Last year, banks withholdings in Greece had to take writedowns on investments in thatnation as default loomed, U.S. money markets pared loans to Frenchlenders and deposits flooded into dollar accounts at the biggestU.S. banks.

Depositors have turned to Denmark and Switzerland as they huntfor currencies with less risk than the euro, whose fate depends inpart on whether cash-strapped nations such as Greece can pay theirdebts.

Denmark's appeal as a haven comes from its triple-A rating, acurrent account surplus and a government debt load that's less thanhalf the euro zone's average. Switzerland, too, is triple-A. Whilea strong currency enables nations to borrow at low cost, it canhurt an economy by making goods and services more expensive forforeign customers, depressing exports and tourism.

Swiss Francs

State Street plans to charge 0.25 percent for accounts in Swissfrancs, the Boston-based company said in last week's note tocustomers, which was obtained by Bloomberg News. The contents wereconfirmed by a bank spokeswoman, Carolyn Cichon.

The charges will apply only to a “small percentage” of customerswhose accounts in the two currencies exceed a set minimum,according to Cichon. At current exchange rates, the threshold wouldbe about 225,000 kroner ($39,000) or 100,000 francs ($107,000),according to a person with direct knowledge of the company'splan.

The Swiss franc weakened after the report, according to GarethBerry, a foreign-exchange strategist at UBS AG in Singapore.

“We doubt the news will have a lasting weakening effect on theSwiss franc, however, given that interest rates have been negativein the interbank market for months, and those who wish to holdSwiss franc deposits for safe haven reasons are unlikely to bedeterred by a 25 basis point penalty,” he wrote in an e- mailednote today.

The franc was little changed at 1.2110 per euro at 10:45 a.m.London time, after earlier depreciating to 1.2143 per euro, theweakest level since Sept. 18. It declined 0.3 percent to 93.60centimes per dollar.

BNY Mellon is charging “an extremely small number of clientsthat hold Danish kroner in their accounts,” according to KevinHeine, a bank spokesman. Heine cited negative short-term marketinterest rates for the Danish krone. “This is being done to covercosts associated with maintaining these deposits, which includecharges being imposed by sub-custodians and market-driveninvestment rates,” he said.

Heine said his company isn't charging customers for holdingSwiss francs. BNY Mellon, the world's largest custody bank, imposeda 0.13 percent charge last year on depositors with unusually highdollar balances to help stem the influx at the New York-basedfirm.

Low Rates

The Danish central bank cut its deposit rate to negative 0.2percent in July, and Switzerland cut its benchmark rate to nearzero in September 2011. Jean-Pierre Danthine, a vice president withthe Swiss central bank, said in June that it might impose negativeinterest rates “if the circumstances warrant it.”

Domestic lenders in Denmark have been weakened by the cut in thecentral bank's deposit rate to below zero, because competition hasforced most of them to keep paying customers a positive rate, FitchRatings said in September.

State Street executives overcame their reluctance to chargedepositors after central bankers in the countries signaled thatbenchmark rates may stay low for an extended period, and as somecompetitors began to impose the charges, said two people withknowledge of the plan. The people familiar with the two U.S.custody banks requested anonymity because the decisions haven'tbeen discussed publicly.

While depositing customers' money at the Danish central bank isone option, the market rate for lending money for a one- weekperiod to other Danish banks also has turned negative, currentlyabout minus 0.03 percent.

“The industry is experiencing unprecedented market pricingbehavior in these two countries, and State Street needs to ensurewe continue to provide our clients with the most efficient pricingin all of the markets where they operate,” Cichon said in ane-mailed statement.

State Street is “just reflecting where the market is,” saidHerring of the University of Pennsylvania.

UBS, Switzerland's biggest bank, in August 2011 consideredlevying a temporary fee on Swiss franc balances to stem flows intothe customers' cash clearing accounts. The pressure abated the nextmonth when the Swiss National Bank cut the benchmark rate.

Spokeswomen for Zurich-based UBS and New York-based JPMorganChase & Co., the biggest U.S. bank, declined to comment onwhether they plan any negative rates.

Interest rates have fallen below zero before. U.S. Treasurysecurities traded at negative yields during parts of the 1930s and1940s, and Switzerland imposed negative interest rates in the 1970sas part of capital controls.

Still, negative rates can produce unintended consequences. Thatcould include customers keeping large amounts of cash in vaults,taxpayers making excess prepayments in anticipation of a fullrefund and savers keeping cashier's checks made out to themselvesin a drawer, according to an Aug. 29 blog post by researchers atthe Federal Reserve Bank of New York.

Bloomberg News

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