The government will consider injecting public money into merged regional financial institutions to boost their capital bases to encourage regional banks and credit associations to merge, the Financial Services Agency said Wednesday.

The government will also consider raising the limit of its full-refund guarantee on deposits for the merged institutions as a special condition, according to the FSA's interim report on measures to promote reorganization of regional banks.

The FSA is likely to consider the public fund injection if the capital adequacy ratios of merged banks fall as a result of mergers.

The agency has been encouraging regional banks to move for realignment to improve their profitability and strengthen their financial standing ahead of the planned introduction of the limited refund guarantee system on all types of deposits in April 2003.

The agency believes the realignment will help strengthen the nation's entire financial system.

On April 1, the government imposed a cap of 10 million yen per bank per depositor on time deposits it will reimburse in the event of a bank failure under its deposit insurance system.

It plans to impose a similar cap on ordinary deposits, checking accounts and other types of liquid bank savings starting April 1, 2003. Liquid deposits are assets that can be cashed in immediately on demand.

Regional banks are reluctant to merge, apparently due to concerns that depositors who have accounts in both of the merging institutions may withdraw their savings from the banks and transfer them to other financial institutions because of the 10 million yen limit.

The FSA reportedly thinks raising the 10 million yen limit for merged banks for a certain period of time may be necessary so as not to discourage regional institutions from forming mergers.

The interim report proposes extending measures to support integration of computer systems at merged institutions to reduce their financial burdens, such as tax incentives.

FSA Commissioner Shoji Mori said earlier this week the agency will be ready to help regional financial institutions consolidate or seek mergers, though they should ideally seek realignment by themselves.

Kansai execs worried

Lawmakers from the Liberal Democratic Party said Wednesday business leaders in the Kansai region have expressed caution over the pending termination of the government's full guarantee of demand deposits at banks that fail.

The issue -- the full guarantee being replaced by a cap of 10 million yen per depositor per bank -- has pitted reform-resistant factions within the LDP against Prime Minister Junichiro Koizumi. So far Koizumi has insisted that the cap will take effect as scheduled April 1.

The ceiling is considered a key reform that will help the banking system shed insolvent institutions and lessen the bad-loan problem. But some in the LDP want to keep the full guarantee, hoping it will prevent banks from going belly up and keep the yen spigot open to shaky corporate borrowers.

The business executives, including Yoshihisa Akiyama, chairman of the Kansai Economic Federation, conveyed the views during a meeting in Tokyo with LDP Secretary General Taku Yamasaki, Policy Research Council Chairman Taro Aso, Upper House caucus leader Mikio Aoki and other senior party members.

The business leaders urged the LDP lawmakers to be careful and avoid any adverse impact on corporate borrowers, especially small and medium-size companies.

This past April 1, the government imposed the 10 million yen cap on time deposits. If the cap is also placed on ordinary deposits, checking accounts and other types of liquid bank savings as scheduled, more depositors may shift their money away from regional banks to major money center banks, imperiling small, weak banks.

A spillover could effect some corporate borrowers, analysts say.

"We should never let (the government) do that," Aso told reporters after the meeting.