Japan's Financial Services Agency asked regional banks to limit their investment losses as it bids to strengthen the financial health of smaller lenders, Reuters reported May 18, citing two people with direct knowledge of the situation.

The FSA told regional banks to limit their investment losses to within the amount of profits on their core lending business or equity capital. Banks should sell some of those investments to keep within the limit, sources said.

Japanese banks do not book losses on their securities investments until they are realized. The FSA's latest directive discourages smaller banks from making risky investments that could impact their financial health.

A spokesman for the regulator declined to comment while an official for the regional banks' association group declined to talk about the lenders' investment strategies.