* FSA proposes 15 pct mortgage risk-weight floor
* Says Swedish banks exposed to mortgage risks
* Proposed rules will bring banks in line with Europe
* Nordic bank shares outperform index
(Adds Moody's statement, updates shares)
By Mia Shanley and Johan Ahlander
STOCKHOLM, Nov 26 Sweden's banks need to more
than double their capital buffers against mortgage lending risk,
the industry regulator said on Monday as it tries to safeguard
an over-sized financial system.
Dominated by Nordea, Handelsbanken, SEB
and Swedbank, the banking sector's assets
are more than four times the size of economic output and
regulators want to reduce the potential for future financial
The mortgage proposal from one of Europe's toughest
regulators came as ratings agency Moody's upgraded its outlook
for Swedish banks to stable from negative citing strong asset
quality, high capital and healthy profitability.
Conversely, rival agency Standard & Poor's cut its outlook
to negative from stable last week.
The Financial Supervisory Authority (FSA) said it wanted
banks to use a 15 percent risk-weight floor for mortgages. The
capital buffers which banks have are calculated using different
risk-weights for different kinds of loans.
"Swedish banks are substantially exposed to risks in Swedish
mortgages," the FSA said. "The forthcoming requirements will
bring about a more stable financial system which will in turn
generate positive effects on the economy."
Banks have for years suffered low loan losses in mortgages
and have therefore used single-digit average risk-weights on
But Swedish household debt has risen to 170 percent of
disposal income, one of the highest in Europe.
The banks currently set aside less capital for losses from
mortgages than peers - around 6 percent on average versus around
25 percent in Europe - according to the central bank.
The FSA said it believed that banks already had the funds to
increase capital buffers, meaning they would not need to raise
Swedish banks are some of Europe's best capitalised lenders,
but regulators see them as being vulnerable due to a reliance on
market funding and extensive international operations.
However, Moody's said the Swedish economy had outperformed
most of the euro zone, helping to insulate its banks from the
debt problems plaguing other parts of Europe. It said an
economic slowdown would not likely materially hit banks' asset
"We expect loan repayment capabilities will continue to be
supported by low interest rates and households' resilient
financial profiles," it said.
Nordea, the region's biggest bank, backed the risk-weight
proposal. "This has to do with investor confidence," said Rodney
Alfven, head of investor relations. "We support the basic idea."
Swedbank, one of Sweden's biggest mortgage lenders and the
bank whose core tier one capital ratio will be most affected,
said the guidelines were reasonable.
It has previously said a 15 percent risk-weight would reduce
its core tier one ratio by 2.3 percentage points.
Nordic bank shares were down 0.3 percent by 1430
GMT, outperforming a European banking index, which was
down 1.2 percent. Swedbank shares, which had been under pressure
due to uncertainty over the rules, were up 0.9 percent.
"Although it was in line with expectations, this is still
important. This was the final piece in the capitalisation
debate," said Andreas Hakansson, an Exane BNP Paribas analyst.
Changes to risk-weightings completes a slew of new rules
that have made life tougher for Swedish lenders.
Sweden has already asked its lenders to hold 12 percent core
capital by 2015, a higher level than most other countries, and
banks have boosted balance sheets by cutting risky lending and
building up capital. That has raised costs but also made them
some of Europe's safest, most attractive lenders for investors.
(Additional reporting by Oskar von Bahr; Editing by Erica