Japan’s new financial watchdog started an inspection Monday of the troubled Long-Term Credit Bank of Japan to scrutinize its problem loans, agency officials said.

LTCB is negotiating with Sumitomo Trust & Banking Co. on a possible merger. The results of the inspection by the Financial Supervisory Agency are expected to have a large influence on the merger talks because Sumitomo Trust has said it will not take over bad loans held by LTCB, even if they agree to merge.

The probe is part of the agency’s planned inspections of the top 19 commercial banks. Inspections are expected to be completed by mid-September. LTCB is the first bank to be screened by the agency, which was created June 22 to take over the financial inspection and supervisory functions of the Finance Ministry.

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