Banks charge clients for Danish kroner, Swiss franc deposits

By Luke Jeffs

LONDON, Oct 9 (Reuters) - Some of the world's largest custody banks have started to charge fund management clients for deposits in Danish kroner and Swiss francs, showing how the euro zone crisis is affecting their business.

The banks' action follows interest rate cuts by Denmark and Switzerland to protect their currencies from investors seeking safe haven from the euro. But the rate cuts have made it difficult for the custody banks, wh i ch administer funds for asset managers and pensions, to cover their costs in certain areas.

They have traditionally covered costs by lending out the cash deposited with them to other banks as short-term loans. But this revenue source in the kroner and franc has dried up now that Denmark and Switzerland have cut rates.

As a result, Bank of New York Mellon , Euroclear, RBC Dexia and State Street have introduced negative interest rates, which effectively mean they are charging clients for holding their cash.

The banks said they have taken the step to offset the cost of administering the accounts when those countries' central banks have interest rates at close to or below zero.

"State Street has been closely monitoring central bank activity, swap markets and the overnight cash markets, and based on market conditions will start to apply negative interest rates in two currencies, Danish kroner and Swiss francs beginning on November 1, 2012," the bank said in a statement.

Spokesmen for BNY Mellon, Euroclear and RBC said they had introduced negative interest rates in recent months.

A spokesman for RBC added: "If these markets return to positive nominal interest rates, we would reflect this change in the interest rates applicable to client balances."

(Editing by Jane Merriman)

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Keywords: BANKS DEPOSITS