June 4, 2020 / 7:00 AM / a month ago

UPDATE 1-Swedish FSA says financial system stable, warns against bank dividends

(Adds detail, background)

STOCKHOLM, June 4 (Reuters) - Measures taken by Swedish authorities have stabilised the financial system, but banks need to maintain their financial strength and not make payouts to shareholders, a regular report by Sweden’s financial watchdog said on Thursday.

Although Swedish banks are well capitalised, a continued economic downturn could significantly increase funding costs and sour loans, meaning banks should retain their cash as a precautionary measure, the FSA said in a statement.

“The banks should maintain their resilience in the uncertain situation we find ourselves in by not making payouts,” the Financial Supervisory Authority said in its first Stability Report since the start of novel coronavirus pandemic.

“In that way they can continue to lend to companies and households and by that, soften the repercussions of the crisis.”

Sweden’s major banks, Swedbank, SEB and Handelsbanken, have postponed their dividends until the economic situation becomes clearer, with all adding they have the necessary funds to make payouts.

The FSA has taken a range of emergency measures to bolster the economy in the face of the pandemic, including suspending mortgage repayment rules for households and easing capital buffers for banks.

The central bank reckons the economy could shrink as much as 10% this year. In that scenario, credit losses for banks could reach around 3% of bank lending, according to the Riksbank’s stress tests.

Reporting by Simon Johnson and Colm Fulton; editing by Niklas Pollard

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