The alliance by Hachijuni Bank Ltd., Joyo Bank Ltd. and Gunma Bank Ltd. is aimed at cutting costs through the joint development of financial products and other measures, said Makoto Shinohara, spokesman for Hachijuni Bank.

He said competition will intensify as major Japanese banks increasingly shift their attention to domestic markets. A joint committee set up by the three Tokyo banks will work out the details of the broad alliance, the spokesman added.

Earlier this month, 15 of Japan's largest banks received a total 7.5 trillion yen ($63.48 billion) in public funds as part of a government bailout to stabilize the nation's financial system.

In obtaining taxpayer money, some of the 15 banks were forced to close or integrate overseas operations, and were urged to restrict their activities to the domestic market.

Japan is mired inits worst recession since World War II, as debt-ridden banks scale back lending, starving companies of cash. Many financial institutions are struggling to write off massive bad loans left over from the late 1980s.

Over the past several years, the three regional banks involved have shed jobs and closed branches while disposing of bad debts they held, according to the Nihon Keizai Shimbun business daily.

The three banks have cross-shareholdings among them, with each holding up to six million shares. Hachijuni, Joyo and Gunma all have relatively strong balance sheets, with problem loans as defined under US accounting standards as between 2 per cent and 3 per cent of their loan portfolios, the bank spokesman said.