STOCKHOLM, Sept 8 (Reuters) - Sweden's central bank and financial watchdog on Tuesday expressed reservations about a scheme outlined by the European Union for banks to build higher capital buffers in good times using dynamic provisioning.
Under the proposal sent around to financial authorities across the 27-nation bloc, the Commission outlined the possible introduction of a system of bank provisioning and capital buffers along the lines of a scheme currently in force in Spain.
The Riksbank and the Swedish Financial Supervisory Authority said in a joint reply to the Commission that the system of so called "dynamic provisioning" as mooted by the EU executive needed to be studied further before implementing was considered.
"Swedish authorities support the objective of reducing potential pro-cyclical effects of financial regulation by introducing counter-cyclical measures. However, we do not believe that dynamic provisioning is the right way forward," the two Swedish institutions said.
Dynamic provisioning is where a bank makes accounting provisions against loans outstanding during the reporting period in line with a forward looking estimate of "expected loss".
Some policymakers say this would ensure that banks could cover a loss more quickly -- with less need for government bailouts -- and smooth out sharp swings in the economy. Losses are currently accounted for at the time they happen.
Accountants say dynamic provisioning distorts a bank's statements, that the role of accounting is not to support economic stability, and that regulators should simply require banks to hold more capital.
The Swedish authorities pointed to technical difficulties with the proposed system and said that any such scheme was best introduced in an upturn in order to avoid the risk of putting pressure on equity capital at banks.
The European Union is in the midst of ironing out a raft of measures aimed at boosting oversight and financial stability as part of a global push to apply lessons learned in the worst financial crisis since the 1930s.
The Commission is to propose a third round of capital reforms in autumn that could include liquidity requirements, a simple cap on leverage or that banks are required to build higher capital buffers in good times so that they can be reduced during downturn.
(Editing by Ron Askew)