Japan’s regional banks face an ever-tightening business climate. Steep population declines in many parts of the country have eroded their customer base by reducing the loan demand by local companies in the markets they serve, while the ultralow interest rates under the Bank of Japan’s protracted monetary easing policy have cut their profitability by cutting the lending margins. For such financial institutions, merging or integrating operations with fellow regional banks is deemed a key step for survival.

Recent approval by the Fair Trade Commission for a plan to integrate the operations of two Kyushu-based banks, which had been put on hold for two years due to anti-monopoly concerns, should facilitate the banking sector’s realignment through more such mergers. The case should also facilitate discussions for reviewing the competition policy in a shrinking market environment.

The Fukuoka Financial Group (FFG) and Eighteenth Bank reached a basic agreement in 2016 to integrate their management. But the FTC’s screening of the plan took more than two years as concern was raised that Eighteenth Bank, the largest bank based in Nagasaki Prefecture, and the Sasebo-based Shinwa Bank under the FFG’s wing, the second-largest, combined would create a financial institution with an alarmingly dominant share of the prefecture’s lending market. In fact, the two banks put together would have commanded a 75 percent share of lending to local small and medium-size companies.

The standoff over the merger — which also involved the Financial Services Agency, which wanted to promote realignment of regional banks through mergers to beef up their efficiency and profitability — was eventually resolved after the FFG and Eighteenth Bank agreed to transfer about ¥100 billion of their outstanding loans to rival institutions in the prefecture to reduce their market share to around 65 percent. This is still high but apparently deemed by the FTC as a level that could maintain a fair competitive environment in the local lending business.

If a company monopolizes the market in the absence of a competitor, consumers will have no choice to buy its products or services at the terms dictated by the firm, thus putting the company at an overwhelming advantage. The anti-monoply law is aimed at ensuring a fair competitive environment to protect the interests of consumers. In the FFG-Eighteenth Bank merger, the FTC argued that the dominant share of the lending market in Nagasaki Prefecture that the merged bank would command could allow the bank to raise lending rates to the disadvantage of its customers. The FSA meanwhile called on the FTC for a more realistic assessment of such a risk, saying that even if the merged bank claimed a large share of the local market, the bank would not automatically raise the lending rates given that institutions from outside the prefecture are increasingly competing to lend to Nagasaki customers.

As the environment of protracted low interest rates eats into the profits from banks’ lending business, many regional institutions are reportedly competing with each other to grab customers by offering lower rates, further eroding their profitability. In the last business year to March, more than 60 percent of the 80 regional banks listed on stock markets either reported declining profits or suffered losses. Many of these banks reportedly sustained losses in their mainstay lending operations. Weakening of regional banks would not contribute to sustaining struggling regional economies.

With the FTC’s go-ahead, the FGG and Eighteenth Bank will integrate their management next April, and Shinwa Bank will officially merge with Eighteenth Bank in April 2020. They plan to integrate their computer systems and streamline overlapping outlets to improve the efficiency of their operations. They also say they will monitor the lending rates to local customers so that the risk cited by the FTC would not materialize — which is crucial. Their merger should not set a bad precedent that might deter future similar bank mergers.

The government is reportedly reviewing its competition policy toward companies that provide crucial service to regional customers, such as regional banks and local bus services, with a view to facilitating realignment of such sectors. Some say that the Anti-monopoly Law is a system designed in an era when the population was growing and the market was expanding — and may be incongruous in many of Japan’s regional economies where the population is declining and the market is shrinking. How to secure a healthy competitive environment while ensuring that crucial services such as public transportation are maintained in a shrinking market environment will be a key challenge and should be sufficiently discussed.

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