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TOKYO, July 31 (Reuters) - Japan's new top financial regulator is keeping the pressure on regional banks to consolidate, urging them to consider tie-ups and mergers to improve their profits and capital positions, said people involved in the process.
Kiyoshi Hosomizo, appointed commission of the Financial Services Agency early this month, told an off-the-record meeting of regional bank officials that action was needed, according to people who attended the meeting.
"To strengthen profitability and make capital policies, one of the various choices for swift action would naturally be tie-ups or mergers," Hosomizo was quoted as saying.
"I would like you to show leadership and proactively come to grips with these various issues. This means taking action where you can."
An FSA representative said the agency was not immediately able to comment.
Hosomizo's predecessor at the FSA, Ryutaro Hatanaka, stunned the nation's smaller lenders earlier this year by telling them to consider mergers as options for survival. The regulators fear that at 105, there are too many regional banks in the nation's shrinking local economies.
The regional banks together have roughly half of Japan's $4 trillion outstanding bank loans, while holding about as much in deposits as the seven biggest banks. The average interest rate that listed regional banks charge has fallen to 1.6 percent as of March from 2.2 percent five years earlier.
Outside of Tokyo, Osaka and a few major cities, the outlook for the working-age population - and thus the prospect for loan demand - is grim. To avoid a potential bankruptcies or collapses due to low deposits or poor loan coverage, Tokyo is encouraging the ultra-conservative small banks to embrace change.
In a report on banks and insurers published this month, the FSA pointed out there is a high correlation between outstanding loans to local corporate clients and a region's working-age population and said it estimates outstanding loans will decrease in all regions by March 2025, based on demographic projections.
"There is a possibility that business model based on loan increase (seen in many regional banks' business strategies) will not be sustainable in medium and long term," the report said, taken by regional bank insiders as another push by the regulator.
Hosomizo's tone is considered more moderate than that of Hatanaka, who was seen by regional bank insiders as unusually blunt. But the new regulator's remarks indicate he is equally adamant that regional banks must adapt to survive.
"I don't think there is a difference in their stances toward regional bank consolidation," said a senior executive at one of Japan's three megabanks. "That's because the situation has not changed. Regional banks have to do something, or they cannot survive."
(Reporting by Sumio Ito and Taiga Uranaka; Additional reporting by Takahiko Wada; Editing by William Mallard, Chris Gallagher and Michael Perry)