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Swedish regulators worry about banks' assets being tied up

STOCKHOLM, Oct 9 (Reuters) - Swedish regulators are worriedbanks have too many assets tied up as collateral for theirborrowing and want them to start stating how much they havepledged, minutes of a meeting of regulators showed on Tuesday.

Concern about what the regulators called the encumbrance ofbanks' assets is a fresh sign of Sweden's unease about risks inthe financial sector, where bank assets are about four times thesize of national output, one of the highest levels in Europe.

"The participants noted that in international terms, Swedishbanks have a relatively high degree of encumbered assets," theminutes of a meeting of the Council for Cooperation onMacroprudential Supervision, held early this month, said.

Regulators have already expressed concern over banks'attaching a low level of risk to mortgage lending as well asover rapid growth in mortgage lending and a reliance onshort-term market funding.

Sweden's banking sector is dominated by Nordea ,Handelsbanken, SEB and Swedbank .

The council, set up by the central bank and FSA bank sectorregulator, n oted that lenders often pledged assets to getfunding or to decrease the cost of funding.

In Sweden, this included banks funding mortgage lending viacovered bonds, which gave the bondholder a pledge on a specificpool of mortgages.

Extensive asset encumbrance could bring liquidity risks asbanks would have fewer assets to pledge as collateral in acrisis, at a time when demand for collateral for existing debtswould rise, the minutes of the meeting, which included the headof the FSA and the head of the central bank, said.

Such encumbrance could also transfer risk to taxpayers asthe deposit guarantee system would not be able to recover asmuch from a bankrupt bank's estate if the assets had beenpledged to someone else, the participants said.

"The participants also found it desirable that the banksthemselves should take the initiative of beginning to publishinformation that makes it possible for external parties toassess their level of encumbrance," the minutes said.

Sweden has already decided to impose higher levels ofcapital adequacy on its banks.

(Reporting by Patrick Lannin; Editing by Susan Fenton)

((patrick.lannin@thomsonreuters.com)(+46 70 721 1007)(ReutersMessaging: patrick.lannin.thomsonreuters.com@reuters.net))

Keywords: SWEDEN BANKS/

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