Bank of Japan Gov. Yasuo Matsushita urged Japanese financial institutions Monday to expedite the disposal of their bad loans and reinforce their capital bases to regain the trust of the markets, saying financial market players are taking an increasingly severe look at their financial health.At the opening of a two-day quarterly meeting of the central bank's local branch managers, Matsushita called the importance of financial firms making their management system strong enough to survive evaluations by the markets "an extremely critical agenda."The environments are becoming tougher for banks with the upcoming new capital adequacy requirements and the "Big Bang" financial reforms, he told managers from the bank's 33 domestic branches and its New York, London and Hong Kong offices.Matsushita expressed hope for quick approval of the financial stabilization bills the government has submitted to the current Diet session. The bills are to strengthen Deposit Insurance Corp. and enhance the capital bases of financial institutions. "I hope the plan to stabilize the financial system will be ready soon," he said.During the same meeting, the branch managers reported that regional economies have been worsening as consumer spending remains sluggish and financial institution failures have chilled business sentiment. Eiichiro Kinoshita, the BOJ's Osaka branch manager, said at a news conference that although exports are modestly rising, production in the Osaka area is weakening and the regional economy on the whole is deteriorating. "The bearish sentiment prevails as businesses are not sure of when the fall in household expenditures will stop," Kinoshita said, speaking about the economic climate in Osaka, Wakayama and Nara prefectures.Business fixed investment, especially in the nonmanufacturing sector whose performance is worsening, has generally stood still, he said. In consumer spending, department stores posted brisk New Year's sales but their performance has remained stagnant since mid-January, he added.While increasing exports have kept production of electronics parts at a high level, production of air conditioners and auto parts is decreasing along with the stagnant domestic demand, according to Kinoshita. The employment and income situation has further slowed their pace of recovery, he said.Financial institutions in the region are becoming more cautious in lending to firms, partly because of capital adequacy requirements, he added. In the Tokai region, including Aichi Prefecture, there is no sign of recovery in automobile sales, the area's core industry. In addition, exports of auto parts have slowed due to Asia's economic crisis, said Yoshiharu Obata, Nagoya branch manager.But Obata told reporters that he does not expect the economy to fall into a recession for two reasons. The first is the solid foundation for corporate income, thanks to manufacturers' restructuring, and the weak yen, and second a resilient business sentiment amid various large projects, such as construction of a new international airport.