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Sweden Banks Need More Resilience in Long Run, Riksbank Says

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May 27 (Bloomberg) -- Sweden’s banks need more resilience in the long run and must ensure they have adequate buffers to withstand prolonged periods of economic weakness, the country’s central bank said.

“The major banks are highly resilient to a weaker economic climate in the short term, but there are vulnerabilities in the structure of the Swedish banking system that may have a negative impact on financial stability in the longer term,” the Riksbank said in its financial stability report. “The Riksbank therefore recommends that the major banks continue to ensure they have adequate capital and liquidity, and that they improve their public liquidity reporting.”

Sweden is pushing through stricter capital requirements for its banks than elsewhere in Europe to protect the $500 billion economy. The country also last week tripled its risk-weights on mortgages to limit a build-up in debt, which has swelled to a record 174 percent of disposable incomes this year from about 90 percent in the 1990s, the central bank estimates.

Sweden’s central bank, which announces its next rate decision on July 3, last month postponed tightening plans by about a year to late 2014 after krona gains and weak domestic demand prevented the bank reaching its inflation target. The Riksbank resisted calls to cut its repo rate, arguing the move would fuel debt growth and record-high property prices.

Swedish economic growth slowed to 0.8 percent last year from 3.7 percent in 2011 as the economy suffered from spending cuts in debt-stricken Europe. Sweden exports about half of its output, of which about 70 percent go to Europe.

“A long recession in the euro area accompanied by unease on the financial markets may lead to an increase in loan losses for the major Swedish banks and to a decline in their earnings,” the Riksbank said. “Swedish housing prices may also fall if Sweden is hit by a prolonged economic slowdown.”

To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman in Stockholm at jbergman@bloomberg.net

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