AWARDS Best bank for Scandinavian currencies: Danske Bank

A low interest and low volatility environment has been a headache for all banks operating in foreign exchange – during such times, market participants tend to sit on risk. This has dampened demand for hedging-related activities and put risk management in the spotlight for dealers, says Karl Niklas Karlsson, global head of currencies and commodities at Danske Bank.

While less hedging also means less demand for FX derivatives from the bank’s clients, managing risk on existing exposures has been further complicated by below-zero interest rates in two Scandinavian countries.

 “Spot liquidity is rather good on average, but FX options liquidity and volumes in the Swedish krona and the Norwegian krone options have worsened,” says Karlsson. “This means that when the currencies begin to move it’s more difficult to control risk. With lower volatility there’s less need for hedging and the moves become speculative directional bets, which are harder to cover.”

Danske Bank, which won Best Bank for Scandinavian Currencies at the 2017 FX Week Best Banks Awards, says that in an environment of such low volatility the bank keeps a very close watch on its use of capital.

We don’t sit on risk for the sake of it. Compared to five years ago, for example, today we don’t sit on risk when the allocated capital can earn a higher return elsewhere

Karl Niklas Karlsson, Danske Bank

“We don’t sit on risk for the sake of it,” says Karlsson. “Compared to five years ago, for example, today we don’t sit on risk when the allocated capital can earn a higher return elsewhere.”

Several years ago, Danske revised its foreign exchange strategy somewhat. Instead of providing prices across a broad range of currencies, the bank chose to focus on Europe’s Nordic units; namely, the Norwegian and Danish krone, the Swedish krona and the euro for Finland.

Danske also started recalibrating how it manages its client relationships. As part of what the bank calls a “cultural transformation”, it embarked on a multi-year restructuring of its FX services to become more customer-centred by breaking down silos.

With this customer-focused cultural transformation, Danske aims to achieve high customer satisfaction and become the best FX bank for Nordic currencies. It expects to have completed the restructuring of its services by 2020.

“It’s been a challenge to move away from being a risk house to focusing on being more customer-centric,” says Karlsson. “But when a client comes to the bank, we provide advice based on a team built around the whole value chain, including sales, relationships, risk, research and structuring.”