The government may provide as much as 1 trillion yen to banks that agree to consolidate, according to a proposal outlined Thursday by the Financial Service Agency.

The FSA will request 1 trillion yen in the fiscal 2003 budget to give to regional financial institutions that consolidate.

In a report on proposals aimed at encouraging regional institutions to merge, the FSA also said it plans to raise the limit on its deposit guarantees for merged regional institutions for up to two years as an added incentive.

The FSA officials said the new limits would be the number of banks involved in the merger times 10 million yen.

Regarding the planned 1 trillion yen budget request, the agency will ask the government to set up an account with the state-backed Deposit Insurance Corp. to hold the funds. The government already has a 15 trillion yen account at the DIC to shore up financial institutions in case of emergencies.

FSA officials said the money would be allocated to merged regional institutions that request funds to bolster their capital bases, which may be depleted if banks clear their losses before merging.

The banks would issue new shares in return for the funds.

The FSA said it will ask for a total of 16.6 billion yen, up from 13.52 billion yen in the fiscal 2002 budget, primarily to promote measures to ensure the stability of the financial system, such as accelerated disposal of nonperforming loans at banks.

The FSA has been encouraging regional financial institutions to consolidate to improve profitability and strengthen management before the imposition on April 1 of a 10 million yen guarantee cap for most types of deposits.

On April 1 this year, the government imposed a cap of 10 million yen per bank per depositor on time deposits.

Encouraging consolidation among regional financial institutions is in line with the government's basic economic and fiscal policy adopted in June, which calls for promoting mergers of banks to ensure the stability of Japan's financial system.

The agency also said it will request tax incentives for banks that are to consolidate, including reduced tax burdens to integrate their computer systems.

Of the 16.6 billion yen request, the agency plans to set aside 10.78 billion yen to hire 225 new staff members to improve bank audits and launch inspections of governmental financial institutions.

The FSA plans to start inspections in fiscal 2003 of governmental financial institutions, including the Government Housing Loan Corp. and the Japan Finance Corp. for Small Business.

It also plans to conduct audits of a postal corporation to be established in the next fiscal year.

Meanwhile, the FSA said it will request a number of tax-reform measures involving securities transactions in fiscal 2003 partly to encourage individuals to invest in stocks.

Among the reforms, the agency wants to extend to 10 years the period in which the 20 percent tax on stock sales will be reduced to 10 percent if an investor has held the stocks for more than a year. Under the current schedule, the preferential tax will be applied over three years starting from the next fiscal year.