Swedish bank’s credit losses are expected to be lower than previously assessed, the Riksbank said in an upbeat report.

The financial markets have begun to function better and the recession appears to have bottomed out, Sweden’s central bank Governor Stefan Ingves said Thursday in an upbeat statement as he presented its Financial Stability Report.

”The situation in the financial markets has improved and it has become easier for the major Swedish banks to obtain funding. At the same time, the prospects for their borrowers have improved”, he said.

Although future developments still are uncertain, the recovery in the economy is from a very low level and parts of the financial markets are still not functioning the picture of the Swedish banking system is far from as gloomy as just a few months ago.

Loan losses in the bank system are expected to be lower than was assessed in June and “the banks have sufficient capital to meet larger losses than in the main scenario”, the Riksbank pointed out. Still, credit risk is still the most prominent risk for the major Swedish banks, especially from the banks’ activities in the Baltic countries.

In the report’s main scenario, the banks’ loan losses are expected to amount to a total of 155 billion kronor ($23 billion) during the period 2009 to 2011.

All of the major Swedish banks -- Nordea, SEB, Swedbank and Handelsbanken -- perform better in the Riksbank’s current stress test than in the one conducted in June.

“This is largely due to the banks’ improved capital situation, at the same time as the stress test is based on a brighter main scenario”, the central bank said.

“However, if the stress scenario becomes reality the banks could face increased funding difficulties. The Riksbank and other authorities are prepared to manage the problems that could arise from such a sequence of events”.

Globally, financial institutions have so far made losses of around $1,700 billion and injected new capital corresponding to $1,500 billion to cover them. According to the IMF the total losses around the world amount to around $3,400 billion, which means that a lot remains to be reported, the central bank said.