The Nihon Keizai Shimbun reported on Saturday that the two banks have agreed on the trust banking and strategic partnership, which would mark the first strategic alliance between two of the top banks in Japan.

``We are studying the topics discussed in the report, but we have yet to make a decision on the matter,'' Fuji Bank said in a statement.

Dai-Ichi Kangyo Bank (DKB) followed suit with a similar statement on the trust banking alliance, but added: ``We are absolutely not studying a merger.''

According to the paper, the plan, which has yet to be finalised, involves Yasuda selling certain of its divisions -- including pension management and securities custody -- to a trust bank to be operated jointly by Fuji, DKB and Yasuda. Fuji is the largest Yasuda shareholder, it said.

The sale should generate 200 billionyen, which Yasuda will use to dispose of bad loans and develop its retail trust banking specialty, Nikkei said. As of September 30, Yasuda had a securities-valuation loss of about 300 billion yen and about 100 billion of bad loans, it said.

Yasuda is expected to take a 10- to 20-per cent share in the new venture, while the new bank is expected to take over Yasuda's overseas subsidiaries, Nikkei said. Fuji and DKB also are considering an alliance in the securities business, it said. The report comes days after the Japanese government enacted plans to provide capital to the troubled banking sector, which is saddled with hundreds of billions of dollars in bad loans.

The new recapitalisation law, enacted earlier this month, is aimed at pumping up to 25 trillion yen into weak but viable banks -- or in some cases into sound banks with capital-asset ratios of 8.0 per cent or more -- in order to ease a credit crunch and consolidate the sector.

Major banks say they are on a sound footing with capital-assetratios above 8.0 per cent, but analysts said many would not meet the requirement if they were forced to use a more conservative method of evaluating share holdings.

Of the nation's 18 biggest banks, only three banks -- Bank of Tokyo-Mitsubishi Ltd (BTM), Mitsubishi Trust & Banking Corp and Sumitomo Bank Ltd -- have said that they had unrealised profits on securities holdings at the end of September.