The Financial Services Agency will consider effectively nationalizing banks that have received public funds if a bank's earnings fall substantially short of its preset target, FSA sources said Wednesday.

The effective nationalization could take place by converting preferred shares -- purchased from banks in exchange for public fund injections -- into common stock.

Under recently mapped-out guidelines, the FSA will consider conversion if a bank's operating and net profits "fall short by more than 30 percent" of levels estimated by the bank when it took public funds in exchange for issuing preferred shares "for a certain duration," the sources said.