In another attempt to ease the growing credit crunch, Koichi Kato, secretary general of the ruling Liberal Democratic Party, has urged Japan's regional banks to close their international operations and focus on supplying more funds to local companies.

"Many regional banks are trying to attain (the 8-percent capital-to-asset ratio benchmark set by the Bank of International Settlements) to stay in the international financial business. But under current (financial situations), they should rather give up on international business and put priority on channeling necessary funds for companies in their respective regions," Kato told reporters on Tuesday at the LDP's Tokyo headquarters.

Under the government's planned system for determining the health of financial institutions, banks with overseas operations are required to keep their capital adequacy ratios above 8 percent, while domestic banks must top 4 percent. The tough ratios were expected to act as a new early warning system to ferret out bad banks.

But criticism is mounting from various circles that banks are becoming extremely reluctant to extend loans or are already beginning to retrieve earlier loans in order to improve their capital adequacy ratios and meet the criteria. Kato was apparently suggesting that regional banks should focus on domestic business, for which the easier 4 percent benchmark will be applied, so that they can extend more loans without worrying too much about their capital adequacy.