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Japan prepares to ease merger rules as regional banks struggle

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By Reuters

TOKYO (Reuters) – Japan is preparing to ease antitrust rules that will enable some regional banks to merge as they struggle to stay profitable amid low interest rates and a declining population.

Prime Minister Shinzo Abe’s government wants to allow such mergers to go ahead on a limited basis if the move prevents a regional bank from incurring big losses and if the newly formed bank ensures it will not unfairly raise lending rates.

Current rules block mergers between smaller banks outside of Japan’s major cities if the newly formed bank will account for a dominant share of lending in the local community.

An advisory panel discussed the plan on Wednesday and will finalise the details so it can be included in the government’s annual economic growth strategy expected sometime in June.

Profitability at regional banks has suffered because the Bank of Japan’s ultra-ease monetary policy has triggered a collapse in spreads between lending rates and financing rates, which depresses bank margins.

The average spread between lending rates and financing rates has fallen to 1.1 percent in fiscal 2017 from around 1.8 percent in fiscal 2007, according to data from the Financial Services Agency, the country’s banking regulator.

The plight of regional banks has become a headache for the BOJ, which is drawing criticism for hurting financial institutions’ profits by keeping interest rates virtually at zero for years.

Some bureaucrats are concerned about the risk of bankruptcies if banks continue to struggle with low interest rates and declining lending activity.

Around 50 percent of Japanese companies rely on regional banks as their main source of borrowing, documents published by the panel showed, underscoring the risk companies face if a regional bank should fail.

One problem is current antitrust legislation focuses on what the market share of the combined entity would be to determine whether it would hurt competition.

To address this concern, the government is likely to ease merger rules only on a temporary basis and strengthen the monitoring of newly merged banks to ensure they do not abuse their larger share of local lending.

(Reporting by Stanley White; Editing by Jacqueline Wong)