By Junko Fujita and Sumio Ito
TOKYO (Reuters) - Two small Japanese banks made a fresh appeal on Monday to be allowed to combine and pledged to ease antitrust concerns, as a battle between two government agencies that could shape the fate of the nation's 100-plus struggling regional banks intensified.
Fukuoka Financial Group Inc (T:8354) has been wanting to buy Eighteenth Bank Ltd (T:8396) in Nagasaki prefecture and merge it with one of its three lenders, Shinwa Bank.
But the Fair Trade Commission (FTC), Japan's antitrust watchdog, has objected to the takeover since 2016 on the grounds that the merged entity would control about 70 percent of the lending market in Nagasaki, which it says would limit customers' choices and could lead to higher lending rates.
The FTC, which is still reviewing the case, is concerned the merger could create banks that are too dominant, undermine competition and lead to the closure of bank branches in remote areas.
Although Fukuoka Financial and Eighteenth Bank did not offer concrete steps to reduce their share of the lending market in a joint statement issued on Monday, they pledged the merged bank would not raise interest rates unfairly and maintain branches in depopulated areas. "The merger of these two banks is the best choice for the financial support of economies in Nagasaki," according the statement, adding that deteriorating bank earnings would hurt the local economy.
The country's financial regulator, the Financial Services Agency (FSA), on the other hand, wants to promote mergers to help lenders survive as the population shrinks.
Last month, a report from a panel of independent members commissioned by the FSA directly challenged the FTC's notion that mergers would limit customer's choices and lead to higher interest rates by saying an exemption from antitrust law should be made to help the industry survive.
The report even suggested that Japan's antitrust policy may need to be reviewed to adjust to the ongoing change in Japan's economy.
"The competition law is based on the assumption that the economy will grow but Japan is losing population much faster than any other advanced countries," said Naoki Ohgo, an adviser to the FSA. "I wonder whether it is reasonable to apply traditional competition policy to the current situation."
But a senior FTC official last month ruled out the need for applying different rules for mergers for smaller banks. "We do not believe we need to use certain rules for growing industries and other rules for declining industries," Akinori Yamada, FTC's secretary general, told a media briefing.
"All we examine is the current market situation and how a planned merger will affect the market," he added.
Fukuoka Financial and Eighteenth Bank have not specified a target date for the merger but the pledges they made on Monday mean they are still aiming to merge. The FTC could not be immediately contacted for a comment late on Monday.
The outcome will signal how Japan will handle future situations in the regional banking industry, which controls almost half of the nation's 489 trillion yen ($4.5 trillion) in bank lending and is the lifeblood for small businesses.
($1 = 109.2100 yen)
(Additonal reporting by Takahiko Wada; Editing by Malcolm Foster and Muralikumar Anantharaman) OLUSECON Reuters US Online Report Economy 20180507T113321+0000