STOCKHOLM - Sweden's banks are highly exposed to the commercial real estate sector which makes up the main risk to financial stability, central bank Governor Erik Thedeen told parliament's Finance Committee during regular testimony.
"Vulnerabilities primarily include banks' and bond holders' exposure to highly indebted commercial property companies, although high household indebtedness also makes the system vulnerable," Thedeen said.
Property companies account for around 44% of banks' commercial lending, figures from the Riksbank showed.
Heavily indebted real estate developers have been hit by higher interest rates, a refinancing squeeze and changes in property use as a result of the pandemic and a trend toward working from home.
The Financial Supervisory Authority reckons banks could see credit losses of up to 45 billion Swedish crowns ($4.32 billion)in a sharp downturn.
Spreads have already widened and some commercial real estate companies have started reducing debt by selling off parts of their portfolios.
The retail housing market is also a worry. Prices have fallen by around 15% over the last year amid soaring mortgage repayments and a cost of living crisis.
Some households are likely to struggle with payments if interest rates continue to rise, and inflation to remain elevated, though analysts expect the majority to weather the storm.
Tougher regulations introduced after the global financial crisis also mean that banks are better prepared for tougher times.
($1 = 10.4149 Swedish crowns)
(Reporting by Simon Johnson, editing by Anna Ringstrom and Jason Neely)