Swedish banks plead for tougher regulation to prevent housing bubble burst

* Negative interest rates boosting Swedish asset prices

* Banks calling for steps to dampen housing market

* Politicians wary of unpopular measures

Sweden has negative interest rates to tackle the risk of deflation. But with the economy growing strongly, this is fuelling household debt, property prices and the stock market to levels many economists think could become dangerous.

"It is clear that the risks of an unsustainable development in various asset classes is increasing with each day in the absence of powerful political reforms," Swedbank Chief Executive Michael Wolf told reporters last week.

So they are calling on politicians to step in by, for example, making it mandatory for borrowers to pay down the principal of their mortgages and encouraging house building.

"It is quite obvious that if we keep this up for long, there is a clear risk that we run up bubbles and someone has to take care of that," Handelsbanken CEO Frank Vang-Jensen said this week, worried about the effects of ultra-low interest rates.

"If there is any time when there should be acceptance (for new regulation) it is now."

While Swedish banks are currently among the most profitable and well capitalised in Europe, a housing market crash would hit them hard. In addition to lower economic activity and increased loan losses, it could disrupt the mortgage-backed bond market they rely on for funding.

Mortgage lending makes up an average of 50 percent of total loans at Nordea, SEB, Handelsbanken and Swedbank, above the 36 percent European Union average. The four banks account for 80 percent of Sweden's mortgage market.
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