STOCKHOLM (Reuters) - Sweden's financial watchdog on Tuesday proposed increasing the reserves banks must set aside to cover potential losses from mortgage lending in case the country's booming housing market runs out of steam.
Swedish banks are already among the best capitalized in Europe, but the Financial Supervisory Authority is concerned that soaring levels of household debt could still leave them vulnerable if there is a correction in the real estate market.
Proposing a hike of the counter-cyclical reserve from June 2016 to 1.5 percent of banks' risk-weighted assets, the FSA said risks to the financial system had increased compared to last year, when the watchdog set the buffer at 1 percent effective from September 2015.
The counter-cyclical buffer, which is imposed on top of banks' normal capital requirements, kicks in during times of economic strength.
Banks and other market participants will be able to comment on the FSA's proposals before they are adopted but such comments rarely lead to a change of plan.
Sweden's households are among the most indebted in Europe and authorities are concerned that ultra-low borrowing costs - the benchmark repo rate is at -0.25 percent - are encouraging them to take on even more debt.
Prices of apartments and single family homes in Sweden have doubled since 2005 and rose by more than 15 percent in the year to April, figures from the Nasdaq OMX Valueguard KTH Housing Index show.
Lending, mainly for mortgages, has been picking up since mid-2012 and grew 6.4 percent in March from a year earlier easily outstripping the pace of income growth.
"Our judgement is that we are reaching a line where it is dangerous for the economy," Kerstin af Jochnick, First Deputy Governor of the central bank said on Monday.
Sweden adopted a loan-to-value cap on mortgage borrowing in 2010, but many observers, including the International Monetary Fund and European Union, say it needs to do more to cool the housing market.
The FSA had planned to introduce tighter mortgage repayment rules for new borrowers in August but dropped its proposal after a legal challenge.
The government has said it will give the FSA the power to introduce the proposals, but this may not happen until next year.
Other measures - such as reducing generous mortgage tax breaks - are currently not on the table.