The Financial Services Agency (FSA) in Japan is planning to improve the surveillance of local lenders that display stress signs, reported Reuters.

The move comes amidst the prolonged ultra-low-interest rate environment in the country, which has hampered the profitability of local banks.

The monitoring will be increased for those banks that report continuous capital gap or where the capital adequacy ratio falls below 4%, FSA said in its annual report.

In such cases, the watchdog will carry out on-site inspection or may give administrative punishment.

At the same time, the regulator is weighing plans to reduce the deposit insurance rate for banks that are financially strong. The move is aimed at increasing merger activities among regional banks.

Notably, local lenders Bank of Yokohama and Chiba Bank inked a business partnership last month to collaborate in various segments such as retail banking.

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At present, all banks in Japan have to offer 0.033% deposit insurance fee to protect against bankruptcy.

This rule is expected to change, with the rates to be based on the financial resilience of a bank.

In its annual report, FSA stated: “The environment around regional banks has become increasingly severe.

“Regional banks need to establish a sustainable business model and secure financial health.”