Risks in the Swedish financial system have increased, particularly in the heavily indebted commercial real estate sector to which banks have a large exposure, the central bank said in its regular Financial Stability Report on Thursday.

"Property companies are now under pressure from the higher interest rates, partly because their funding costs are increasing and partly because the value of their properties is falling," the Riksbank said in a statement.

"Several companies have large borrowing needs. The Riksbank considers it important that companies continue to strengthen their balance sheets," it added.

Worries recently have centred on real estate group SBB , which is looking for a buyer after its debt was cut to "junk" status and it was forced to halt dividend payments, sell assets and drop a planned round of equity financing.

But SBB is not the only company to struggle with soaring interest rates, falling property values and tighter credit conditions.

Rating agency Moody's said this week it had taken negative rating action on about 50% of the real estate firms it covers in Sweden.

Worries about the sector - which triggered Sweden's last financial crisis in the early 1990s - have even hit the crown currency, which is trading at its weakest level against the euro for well over a decade.

Regulators say banks are better equipped to deal with turbulence in the sector having beefed up their capital buffers after the global financial crisis in 2008-2009.

Bank resolution regulations have also been improved.

But concerns have nevertheless been rising as the surge in interest rates over the last year has exposed faults lines in the financial system, bringing down small lenders in the United States and forcing authorities to arrange a shot-gun wedding for Credit Suisse.

"The banks ... have an important role to play, both by maintaining the supply of credit to viable companies and within the framework of their lending, by requiring property companies to take measures to reduce their financial risks," the Riksbank said in the report.

The real estate sector makes up around 45% of banks' business lending in Sweden.


(Reporting by Simon Johnson, editing by Terje Solsvik and Sharon Singleton)