Some banks in Europe are allowed by regulators to use their own models to assess the risk of losses in their lending portfolios, while others have to use a standard model set by their country's watchdog.

Usually, the standard model is more conservative.

Handelsbanken said it would have to use the standard model from next year.

The move hit Handelsbanken's shares, which were down 5.3% by 1252 GMT.

"This can effect their future dividend payouts, so its clearly a negative," Andreas Hakansson, an analyst at Danske bank said.

"The Swedish Financial Supervisory Authority has decided that, from 1 January 2021, the bank is also to use the standardised approach at group level, when calculating the capital requirement for credit risk at Handelsbanken Plc," the bank said in a statement.

"The risk exposure amount at the bank will consequently increase by approximately 65 billion Swedish crowns (£6 billion) in conjunction with the introduction of the new method," the bank said.

In July, Handelsbanken reported significantly lower loan losses than most of its Nordic and European peers during the coronavirus pandemic, drawing praise from rating agency Moody's.

Robin Rane, an analyst at Kepler Cheuvreux, said the bank had been applying an internal model for assessing risk on property, the sector where most of its exposure is in the United Kingdom.

"The difference between the standardised method and the internal one they had been using is quite high, Rane told Reuters.

The bank said following the change its common equity tier 1 ratio as at June 30, 2020, pro forma, remained over the target ratio range.

(Reporting by Colm Fulton. Editing by Jane Merriman)