The Financial Services Agency has decided to make it easier for regional banks with solid financial standing to put money into their struggling peers, introducing a special measure under which their capital-to-asset ratios will not be reduced, according to officials.
The measure is likely to take effect by the end of the current fiscal year in March, the officials said Monday.
It is aimed at providing a survival option to troubled regional banks that are finding it hard to increase their earnings amid the Bank of Japan’s prolonged low-interest policy but are reluctant to engage in mergers and acquisitions.
Under the current system, capital-to-asset ratios of both major and regional banks are reduced in proportion to the amount of money they invest in other banks that are not consolidated in their earnings results. The rule has been in place to help avert a chain reaction of bankruptcies.
The FSA has already presented a plan to revise supervisory guidelines to the Regional Banks Association of Japan to enable regional banks to take advantage of the special measure, according to the officials, who spoke on condition of anonymity.
The measure is expected to be applied to regional banks that face the risk of their capital adequacy ratios going below 4 percent, the minimum level required by law to operate in Japan, they said.
The draft of the plan also indicates that applicability will be determined by other criteria such as whether the banks to receive financial assistance have the potential to contribute to the economic development of areas where they provide services.
One of the major benefits for regional banks that provide help is that they can make larger income gains if needy banks restore their financial soundness.
Currently, all regional banks in Japan fulfill the required ratio of 4 percent. According to the Daiwa Institute of Research, it stands at 5.85 percent for the bank with the lowest ratio.
Still, a BOJ report released in April estimated that about 60 percent of regional banks will fall into the red in the next 10 years.