A merger of two leading regional banks in Nagasaki Prefecture put on hold by the Fair Trade Commission out of antitrust concerns represents a dilemma involved in the realignment of regional banks, which is deemed a solution to the threats posed to the industry from depopulation and the protracted ultra-low interest rate policy. A breakup of the merger talks could result in discouraging other banks eyeing mergers to survive in an increasingly tough business climate. The parties involved in the gridlock should find a way out by seeking to reconcile the need to maintain a competitive environment in the banking industry with the need to ensure each institution’s business health as both are requisite for sustaining the nation’s struggling regional economies.

Regional banks face severe business prospects as the nation’s population decline threatens to deplete their client base and the protracted ultra-easy monetary policy cuts their lending profit margins. According to a Financial Services Agency estimate released last year, more than 60 percent of the 106 banks that mainly serve local clients stand to suffer losses in their mainstay lending and other businesses in fiscal 2025 — compared with roughly 40 percent of the total that incurred such losses in the business year to March 2015.

It is against this background that regional banks across the country have been pursuing mergers in recent years to ensure their future survival. Fukuoka Financial Group Inc. and Eighteenth Bank, based in Nagasaki, are among them. They initially planned to integrate their operations in April — creating the nation’s second-largest regional banking group with total assets of about ¥19 trillion — and merge Eighteenth Bank and Shinwa Bank under the FFG’s wing next year. That plan, however, was delayed to October and was recently postponed “indefinitely” due to the protracted antitrust review by the FTC.

The FTC is reportedly concerned that the merger of Eighteenth Bank and Shinwa Bank — the two largest banks in Nagasaki Prefecture that together account for roughly 70 percent of outstanding bank lending in the prefecture — could damage consumers’ interests by limiting the choice of local financial institution they can turn to. The FTC’s position is said to be that such a merger could result in keeping loan interest rates high by hampering competition, and small and medium-size companies in the prefecture, in the absence of other major local lenders, could be denied lending or made to accept unfavorable terms in getting loans. The antitrust authority is believed to put priority on such concerns even if the merger is designed as a realignment of the banks for their own survival.

The two banks in question should address the concerns raised by the FTC. FCG and Eighteenth Bank are said to be considering transferring some of their outstanding loans to other banks to reduce their combined share of the local market, although the FTC is reportedly calling for transfer of more of their loans as well as bank outlets to other institutions in order to secure competitive business environment. All the parties involved should explore a solution with a view to reconciling the two seemingly conflicting needs of ensuring a competitive business environment and securing the health of regional banks’ operations.

The functions of regional banks to cater to the financing demands of local small and medium-size businesses serve as lifelines in the economies of the areas they serve. Those local businesses could be at a loss if those regional bank functions are lost or crippled. If the deteriorating health of regional banks becomes a drag on the already struggling regional economies, the impact could spread nationwide. Efforts must be maintained to sustain the profitability of regional banks, including an industry realignment through mergers that allow the advantages of economies of scale to be realized.

Those efforts also should not be restricted to industry realignment through mergers, which will not necessarily solve all the problems confronting the regional banks. Individual banks should scrutinize on their own operations to find areas where there is room for improvement in performance. The banks, for example, should vet new clients by properly assessing the borrowers’ business profitability and future potential, instead of assessing their creditworthiness solely on the basis of the collateral they put up such as real estate. They should review their business models to examine whether they are doing enough to cater to the needs of the local clients they serve. The bank mergers that are carried out to survive the tough business climate should build on such efforts by each of the institutions.

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