TOKYO, Jan 27 (Reuters) - Japan's financial regulator this month urged the nation's regional banks to consider mergers and other tie-ups, a starkly explicit expression of concern for the financial health of smaller lenders, documents showed on Monday.
"We would like you to consider business tie-ups and operational consolidations as part of your management agendas," Financial Services Agency Commissioner Ryutaro Hatanaka told mid-month meetings with officials from regional and second-tier regional banks, according to minutes of the meetings, reviewed by Reuters.
Japan has more than 100 regional banks, accounting for around 40 percent of the country's $4.6 trillion in outstanding loans. But overall loan demand has shrunk 10 percent over the last 20 years, prompting regulators to call for convincing growth strategies and increasing pressure on the banks to consider acquisitions.
An FSA spokesman confirmed that Hatanaka attended the meetings but declined comment on his remarks, which the regulator has not made public.
Hatanaka's comments are in line with a September FSA policy outline that said it was important for regional banks "to make responsible management decisions promptly and consider medium- to long-term management strategies looking five to 10 years ahead".
In this month's meetings, he warned that given the impact of difficult conditions for small and midsize companies and Japan's ageing society on regional lenders' profit structures, "many banks are flashing caution signs".
Specifically, the FSA chief urged smaller banks to consider risks stemming from their large holdings of Japanese government bonds (JGBs). JGBs have buoyed regional banks' profits during years of deflation and economic stagnation but a rise in interest rates could hammer the value of those bonds. (Reporting by Sumio Ito; Writing by William Mallard; Editing by Shinichi Saoshiro)