(Bloomberg) -- Denmark’s central bank governor called on regulators to implement additional capital requirements on banks’ real estate exposures before potential problems materialize.

Commercial real estate exposures, which have risen in recent years, could spark losses at banks once property prices adjust to the new interest rate environment, Christian Kettel Thomsen said in a speech on Monday, throwing his weight behind an earlier proposal by Denmark’s Systemic Risk Council, an advisory unit of the central bank. 

“We believe that the timing is good, before the problems risk becoming serious, and at a time when earnings in the institutions are high,” Kettel Thomsen said. His comments follow a warning from the central bank last week that turmoil in neighboring Sweden could spill over into Denmark, as heavily indebted landlords divest holdings.

The Systemic Risk Council in October recommended the business minister introduce a capital buffer of 7% for exposures to commercial property companies. The proposal has been met with skepticism in the banking sector, with Danske Bank’s CEO Carsten Egeriis warning that it will come “at a high price” as it would tie up 10 billion kroner ($1.5 billion) in capital.

“It’s not a free lunch,” Egeriis said, speaking at the same conference. “It will make it more difficult to borrow, it could slow down new construction and energy improvement of our homes.” 

Commercial property prices could realistically drop another 20%, according to the central bank. For Danish banks, whose exposure to the real estate industry is now about 38% of their corporate exposure, such a decline may result in the collateral pledged for loans becoming insufficient to cover the full exposure, leading to losses if loans default, it said.

Low activity on the property market indicates that there’s “a large gap between buyers and sellers and that property prices have not yet adjusted to the new interest rate level,” Kettel Thomsen said. Commercial properties transactions in Denmark amounted to 22 billion kroner in the first nine months of the year, compared with 97 billion kroner in the same period last year, he said.

“I think we will have to enter 2024 before we really get any clear price signals,” Kettel Thomsen said.

--With assistance from Christian Wienberg.

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