Regulators are increasing the pressure on regional banks to consolidate, worried that shrinking populations outside Japan’s major cities will leave lenders too weak to stand on their own.

After direct prodding from the head of the Financial Services Agency for the more than 100 regional banks to slim down through mergers or takeovers, the regulator has set up meetings with regional bank presidents to grill them on their long-term business plans.

The agenda is implicit but clear, bankers and regulators say: Show how you plan to survive over the coming decades as local economies wither, or look for tie-ups. The FSA’s push will likely accelerate a process, dictated by demographics, that had been expected to take decades, banking industry insiders say.

Top executives at regional banks have shown no public signs of moving toward consolidation. They tend to be local heavyweights, reluctant to share power by merging with other lenders and diluting their status.

“Many bank presidents are thinking it’s not going to happen on their watch,” said an executive at one regional bank.

“Regional banks are feeling growing pressure from authorities to consider consolidation,” said Natsuko Ishida, a financial sector analyst at Moody’s Japan. “Bank executives who were thinking about consolidation in a time frame like 10 years are now under pressure for a shorter time span.”

Kiyoshi Hosomizo, head of the FSA Supervisory Bureau, told regional bank executives in mid-February, “In many regions, the decrease in population is continuing, and as a result, we can expect that deposits will reach a peak,” according to minutes of the meeting.

At the meeting, attended by a phalanx of senior FSA officials, Hosomizo told bankers that regular hearings in March and April will press them on “how each bank will craft its short-, medium- and long-term strategies.”

They will be grilled not only on their current business areas, but also more broadly about how the financial sector should be, including neighboring areas, the minutes show. This is code for regional banks to consolidate, said a former top FSA official. The oblique presentation reflects regulators’ “true feelings versus what must be said in public.”

Those true feelings are already clear enough, as national loan demand has shrunk 10 percent over the last two decades — with the hinterlands the hardest hit.

FSA chief Ryutaro Hatanaka told regional bank heads in January, “We would like you to consider business alliances and mergers as management issues,” according to minutes.

An FSA spokesman declined comment on the agency’s plan for smaller financial institutions.

Change, when it comes, could be dramatic.

Twenty-three banks melded into today’s four major banking groups over the tumultuous 15 years of post-bubble economic and financial crisis through 2005. Regional banks, which extend roughly half of Japan’s $4 trillion in outstanding bank loans, have largely been spared the knife so far.

They are awash with pension savings but can’t find enough borrowers. They have set aside more cash than needed for loan losses and are now able to release some excess reserves, giving them what a senior executive at a major national bank says will be a two- to three-year earnings bump.

But that windfall can’t long mask the prolonged weakness of regional banks’ core business. While net income has jumped, lending profits fell 4 to 5 percent in the six months to September from a year earlier, as loan demand from companies and individuals remains stubbornly weak.

Regional banks are largely tied to the fortunes of their home and nearby prefectures. Aside from Tokyo, Osaka and a few others, the outlook for the working-age population — and thus the prospect for loan demand — is grim. Japan is the fastest-graying industrial power, and rural populations are ebbing even faster as the dwindling numbers of young head for the cities and the ranks of the remaining elderly swell.

“As loan interest rates keep falling, some banks are hard-pressed to convincingly explain how they plan to increase revenues,” said a senior executive at a regional bank near Tokyo.

While regional bank executives may be reluctant, the industry as a whole can see the writing on the wall.

“Regional bank mergers are necessary because local economies also need to be integrated into bigger markets,” said a senior investment banker specializing in regional banks.

A potential spark, bankers say, could be the December return to the stock market of Ashikaga Holdings Co., 10 years after the failed regional bank was nationalized.

A possible poster child for the consolidation drive is Fukuoka Financial Group Inc., the biggest regional bank by assets. The group was created by a merger of lenders in the region and is considered a winner with its growing loan balances.

The group last week nominated Vice President Takashige Shibato as president, to take effect in late June. “Merger is one of the strong strategic options in the future,” Shibato said.

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