Lending for commercial real estate (CRE) is set to become more expensive for Swedish banks as the country’s financial regulator acts on previous statements and launches draft regulation to increase capital requirements in this area.

Sweden’s financial supervisory authority Finansinspektionen (FI) said it assessed there to be increased risks in banks’ lending with collateral in CRE.

In connection with publication of its second 2019 stability report yesterday, it said banks had considerable lending to the sector, which it saw as vulnerable.

“In the presence of extreme financial stress, it could cause significant credit losses for Swedish banks,” the regulator said.

In the consultation document on the draft regulatory change - which is set to add 0.7 of a percentage point to capital requirements for Sweden’s biggest banks - it said: “FI’s analysis indicates that banks with their own internal credit risk models underestimate the risk in lending to the commercial real estate sector and therefore do not have sufficient capital.

“This vulnerability is mainly linked to the historically unique low-interest-rate environment that has prevailed in Sweden in recent years,” it said.

The proposal is for FI to calculate a capital premium for exposures to CRE when it assesses banks’ capital requirements within Pillar 2 of the framework.

This premium corresponds to the difference between a given risk weight and a bank’s actual average risk weight for these exposures, it said.

“The given risk weights have been set at 35% for corporate exposures with security in commercial real estate. For corporate exposures with security in commercial residential properties, 25% applies,” the authority said.

Based on data collected, FI said it was mainly the capital requirements of the country’s three major banks that were affected by this. Sweden’s big three banks are Svenska Handelsbanken, SEB and Swedbank.

Their total capital requirement would increase by 0.7 of a percentage point on average as a result of the change, corresponding to an average 3.6% of their current total capital requirement, FI said.

Back in May, the authority said in its first stability report of 2019 that it saw a need for more capital with regard to banks’ exposures to CRE lending.