Bank of New York Co.'s bid to boost its ownership of State Street Boston Corp. is likely to get support from the Federal Reserve Bank, according to analysts and observers.

But a Fed ruling in favor of Bank of New York could touch off months of litigation because a Massachusetts agency has already rejected the bank's application to buy an additional 4.9% of State Street's stock.

A decision by the Fed is expected in the next few weeks.

The Massachusetts Board of Bank Incorporation ruled last Friday that the Bank of New York had "failed to meet its burden to demonstrate that the public convenience and advantage will be promoted" by the stock purchase.

However, market watchers said the Fed has typically approved such applications-even controversial ones-when they have involved smaller banks.

Regulatory lawyers said the Fed would likely approve Bank of New York's bid because it apparently is not seeking a stake that would lead to ownership or control issues.

"There has been a long history of Fed approvals of minority positions," said a bank regulatory attorney who asked not to be identified. "At the end of the day, I don't think there would be any problems with the Bank of New York in this case."

A spokeswoman for the New York Fed said the issue, as with similar cases in the past, would be decided by the Federal Reserve Board in Washington.

Bank of New York has said that the purchase would only be a "passive" investment. State Street has insisted the purchase is a step toward a takeover.

As a state-chartered bank, State Street falls under the primary jurisdiction of Massachusetts regulators, who are inclined to favor local institutions against outside acquisitions, lawyers said.

Should the Fed approve Bank of New York's application, the New York bank could either appeal to the Massachusetts Supreme Judicial Court or, less likely, go ahead with its planned purchase and risk a lawsuit by the Commonwealth, market watchers said.

The Massachusetts decision could also encourage Bank of New York to pursue an outright hostile takeover of State Street, analysts said.

But many said such a scenario is unlikely. Thomas D. McCandless, an analyst at Nat West Securities, said, "it would be self-defeating to take a more aggressive posture. There are only so many times you can go to the Fed to get approval on a hostile takeover. Bank of New York would start to get a bad-boy reputation."

Bank of New York pursued the first successful hostile takeover in banking history, of Irving Bank Corp., in 1989.

The $53.4 billion-asset Bank of New York announced its intention to buy additional State Street stock in January. The acquisition would raise the New York bank's holdings to 9.9% of State Street's outstanding stock.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.