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STOCKHOLM, March 20 (Reuters) - Sweden needs to be cautious in drawing up rules to make sure its bank system is stable and can withstand another crisis, the central bank said on Wednesday, highlighting concerns about the size of the financial system.
Swedish banks are already among the best capitalised in Europe and came through 2008-2009 crisis in relatively better shape than other European institutions. Still, the central bank said further measures were needed.
"There are therefore good reasons for establishing a safe margin - a respectable distance - to the minimum regulations in the Basel III Accord," central bank chief Stefan Ingves said in a speech, referring to the international bank rules drawn up to prevent further crises.
He said the central bank supported proposals by the financial sector regulator to have a risk weight of 15 percent on banks' books for mortgages, but added:
"We also believe that there are good reasons for analysing whether this floor needs to be raised even further."
Ingves pointed out that the banking sector was four times the size of the economy, that banks depended on financial markets for foreign exchange borrowing and that a large proportion of mortgage home loans had interest-only repayments.
"The important thing is to restore an amortisation culture so that the households' margins are safeguarded and the economy is protected," he added.
He noted that the bank had recently borrowed 100 billion crowns ($15.48 billion) in foreign currency to build up its anti-crisis war chest and said it would be reasonable for banks to bear some of the cost of holding these funds as they would be the beneficiaries of its use in the future.
"Swedish banks have substantial assets in foreign currencies and also have a deposit deficit ... they are dependent on market funding. As a large part of this market funding is short term, a liquidity risk in foreign currency also arises," he said.
Finance Minister Anders Borg, speaking at the same conference, agreed that household debts had to be watched and that he was keen for rises to be capped.
"We cannot have a jump up of 10 to 20 percent, then we, the central bank and Financial Supervisory Authority take measures," he said. He stressed that if banks did not continue to build up capital, the government would come down hard on them.
He said the banks could pay dividends, as long as they continue to build up capital. ($1 = 6.4615 Swedish crowns) (Reporting by Simon Johnson and Daniel Dickson, additional reporting by Mia Shanley and Patrick Lannin, Editing by Alistair Scrutton)