The dreams of creating Japan's sixth largest bank by assets took a major setback after the 2 mid-size lenders Shinsei Bank and Aozora Bank postponed their deal to merge in October. Analysts believe that the Shinsei Bank would now need to raise capital since it was heavily relying on the strong capital base of Auzora bank.

On Monday, Shares of Shinsei Bank fell by 6.7% which is reported to be its 3-month low since November last year.

Since the time Basel committee has asked banks to improve their capital buffers by publishing drafts in December last year in order to avoid a further financial crisis. A minimum tier-I capital ratio of 8% was expected.

Shinsei had improved its capital ratio to 7.83 percent as of the end of December which had once been at 6.02 percent as of the end of March 2009 whereas Auzora's capital ratio was 14.2% at the end of September 2009.

The banks have struggled to post decent profits in recent years. A debt of 621 billion yen is yet to be repaid by both the banks to the government as they received a bailout package after the 1990s crisis. Shinsei will work to raise ratios and Auzora will look forward to expand its networks in the meanwhile, till the deal takes a positive turn.