Jul 22 (Reuters) - Japan's financial regulator has told the country's smaller banks they must find new ways to make profits if they are to survive, warning many face risks when interest rates eventually rise and that some are already in a precarious state.
Some lenders are only managing to stay in the black through bond-trading gains, Financial Services Agency Commissioner Nobuchika Mori told regional bank leaders in closed-door meetings last week, according to two participants.
The unusually blunt language for a Japanese bureaucrat indicated "a real sense of crisis," said one of the participants, who declined to be identified as the discussions were private.
Japan's more than 100 regional banks are struggling as lending opportunities wane with the shrinking of their local populations - pain that has been exacerbated by a squeeze on lending margins from the Bank of Japan's negative interest-rate policy.
The FSA has been nudging them for several years to shore up their finances, but Mori's comments mark an escalation of concern that regional banks are failing to reform while they have the cover of essentially free money from the central bank.
The central bank's massive buying of Japanese government bonds, part of its radical policies to stoke inflation, offer lenders almost guaranteed profits. But if market interest rates should rise and bond prices fall, regional banks would be left with huge losses on their books.
