UPDATE 4-Sweden cbank takes ECB loan; banks pass stress test

Published: 10 Jun 2009 17:32:24 PST

* Swedish cbank to take 3 bln euro loan from ECB

* Swedish watchdog: banks can handle worst-case scenario

* Says banks can absorb 150 bln SEK of losses in Baltics

* Sees no need for capital strengthening by top banks

STOCKHOLM, June 10 - Sweden's central bank said on Wednesday it would take out a hefty loan from the European Central Bank to safeguard financial stability, although a watchdog said local banks could cope with "extreme" pressures.

The Riksbank is borrowing 3 billion euros ($4.2 billion) from the ECB, a move designed to give it breathing space while it builds up foreign currency reserves as part of a previously announced strategy to mitigate banking risks.

The news from the watchdog provided a big boost to Swedish bank shares, but the Riksbank loan announcement was seen as mildly disconcerting for markets as it suggested authorities were under pressure to move quickly.

The Riksbank said two weeks ago it wanted to add 100 billion crowns ($13.1 billion) to reserves, creating a line of defence against financial fallout from the Baltic region, where Swedish banks have made billions of euros of loans.

The Swedish central bank wants plenty of foreign currency on hand to be able to lend to banks if required.

"As I see it, this is a further step by the Riksbank in order to be as prepared as possible if the situation worsens rapidly in the Baltics," SEB analyst Elisabet Kopelman said.

The national debt office said separately it would issue a two-year Eurodollar bond as part of the planned strengthening of the Riksbank's reserves.

Sweden's financial watchdog said separately stress tests of the main banks showed they could manage "extreme" pressures created by a severe recession at home and abroad.

Swedish banking stocks, which had been under pressure from worries regarding their exposure in the Baltic region, shot up on the news. Swedbank climbed 9.2 percent while SEB gained 8.0 percent.

The Swedish crown had strengthened on the stress test news but gave up ground after the Riksbank's subsequent announcement. It traded at 10.76 on the euro at 1057 GMT versus 10.70 early on Wednesday.

"When the Riksbank came out and said it would borrow the 100 billion that spurred market speculation about the Riksbank knowing something others didn't," said Johan Javeus, head of currency strategy at SEB.

"Now the market is asking -- are things moving so fast that they need the money right away?" Javeus said. "This adds a bit to the worries."

WORST-CASE SCENARIO

Swedish banks stayed clear of the risky assets that laid waste to many of their peers on both sides of the Atlantic, but worries have grown regarding billions of euros of loans in the Baltic countries, which are in the clutches of a deep recession.

Sweden's Financial Supervisory Authority said stress tests of Nordea, Handelsbanken, SEB and Swedbank showed they could absorb more than 150 billion Swedish crowns ($19.7 billion) of losses in the Baltics over three years.

This was the worst-case scenario in the tests.

"There is currently no need for any of the big banks to strengthen their capital adequacy based on the regulatory requirements," it said in a statement.

"However, in extreme scenarios the market will most likely require a higher level of capital, which can place pressure on financing possibilities for banks that are most affected."

The watchdog tested three scenarios for 2009-2011, ranging from credit losses of about 200 billion crowns to 350 billion.

A banking analyst who asked not to be identified said the test results looked broadly good. "It is positive that the capital holds, though in one of the stress tests the capital does come in at low levels."

Worries Latvia might abandon its peg to the euro have hurt Swedish banking stocks as well as the crown.

Any currency devaluation is seen hitting the banks since much of the loans are in euros, leaving borrowers with incomes in the Baltic currencies with a mounting debt burden to service.

"Given Swedish banks' exposure to Latvia, I see it (the ECB loan) as more preparation for safeguarding the stability of the financial system. They are doing what they can to be well prepared in case they get any problems," said Gizem Kara, Scandinavian economist at BNP Paribas in London.

"The bottom line is that the Riksbank is quite concerned and wants to boost its reserves in case there is a problem."

The ECB loan will be via an existing 10 billion euro swap agreement. The ECB has reciprocal swap lines with central banks including the Swiss National Bank and the U.S. Federal Reserve, which are used to provide liquidity to banks.

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