The Financial Services Agency will get tough on banks that offer conditional loans to convince borrowers to buy their stocks as a way to boost their capital base, FSA officials said Friday.

The new policy will be spelled out in additions to administrative guidelines for FSA officials.

The announcement comes as the nation’s five largest banking groups are scrambling to raise 2 trillion yen in capital by March 31, the end of fiscal 2002. Of this total, roughly half is expected to be raised through third-party stock allocations, in which the bank chooses the companies that buy the stocks.

Because this process bypasses securities companies, abuses of the system have been slow in coming to light.

Five former executives of bankrupt Tokyo Sowa Bank were found guilty earlier this month of falsely making it appear the bank had adequate capital reserves through a bogus capital increase scheme worth 18.9 billion yen.

Because they were unable to find enough investors for the bank’s third-party allocation of shares, they loaned money to other borrowers and made them purchase the bank’s shares.

There is also failed Ishikawa Bank, which is now embroiled in seven lawsuits filed by depositors who were persuaded to exchange their savings for shares of the bank just a few months before its failure in December 2001.

The FSA promises to monitor banks and to slap management-improvement orders on those that most blatantly violate the law. The FSA hopes the new guidelines will be enough to deter banks from questionable practices.

Regulators will also discourage banks from raising capital from companies that have had their debts partially forgiven or have had interest payments on their debts waived for three months or more.

The FSA has begun seeking documentation that shows banks are acting in compliance with the law.

It will begin by monitoring third-party allocations that have or will be conducted at Mizuho Holdings Inc., Sumitomo Mitsui Financial Group and Resona Holdings Inc., the officials said.

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