WASHINGTON — Several large banking companies are continuing to attack proposed capital requirements on merchant banking investments, warning that their equity portfolios would be badly hurt unless regulators granted more exceptions.

In comment letters to the banking agencies, representatives of First Union Corp., FleetBoston Financial Corp., Citigroup Inc., Mellon Financial Corp., and other companies argued that private equity investments made before regulators unveiled their controversial first proposal last year should be exempted from increased capital charges outlined under the revised plan.

“The relevant investment decisions were based on assumptions of returns that would be invalidated retroactively by regulatory fiat,” wrote Carl V. Howard, general counsel of Citigroup. “All of these investments were made under authorities that predated the effectiveness of the Gramm-Leach-Bliley Act under a regime that never contemplated increased capital charges for equity investments.”

Bankers said that they had not anticipated higher capital charges when they originally made those investments.

“Had such a charge been foreseen … some — perhaps many — of the investments may not have been made or would have been of a different type, in a different amount, or managed differently,” wrote Michael E. Bleier, general counsel for Mellon. “The retroactive application of the proposed rules to existing, legally sanctioned and encouraged investments, will quite likely render many such investments uneconomical — a most unfortunate and unfair result triggered solely by altered regulatory treatment, not because of economic reasons.”

According to the National Venture Capital Association, banking companies made $11.8 billion of private equity investments in 2000, about 10% of all such investments. More than 50% of the bank investments were concentrated in Internet and communication businesses; other sectors included computer software services, industrial, and health companies. Overall, financial companies, including banking and insurance companies, made private equity investments worth $16.7 billion.

Industry analysts said regulators will probably let earlier investments be grandfathered.

“There is not a tremendous risk exposure for grandfathering,” said Gilbert T. Schwartz, a partner in the Washington law firm of Schwartz & Ballen, in an interview Tuesday. “I think they will be inclined to look favorably on something like that.”

But Mr. Schwartz said that regulators are not likely to make any other changes the industry wants. “I’d be very surprised to see regulators make material changes to what they have,” he said. “They feel that they have a charge from Congress to ensure financial holding companies conduct this business in a safe and sound manner.”

A final rule is expected by early fall.

This is not the first time merchant-banking-related proposals have drawn fire. The original plan released in March 2000 would have required companies to hold 50 cents in capital behind every $1 of equity investments. The response was so overwhelmingly negative that Federal Reserve Board officials promised to go back to the drawing board.

The latest proposal, issued in January, would employ a sliding scale based on each banking organization’s aggregate equity investments and Tier 1 capital. It would require them to hold 8 cents for every $1 of equity investments up to 15% of Tier 1. The plan would then require banks to hold 12 cents for every $1 of investments for the next 10%. For investments exceeding 25%, banks would have to hold 25 cents for every $1.

In the proposal, regulators asked whether previous private equity investments should be exempted or whether there should be a phase-in period for applying the new capital charges to prior investments, to allow banks to raise their capital gradually.

Regulators defended their revised proposal at a congressional hearing this month, and said restrictions on banks’ merchant banking activities were required by Gramm-Leach-Bliley.

But industry critics maintained that the proposal would put financial holding companies at a disadvantage, and would conflict with new international capital standards being developed by the Basel Committee on Banking Supervision.

“Despite Congress’ stated intentions, the newly proposed special capital charge … would preclude” financial holding companies “from engaging in merchant banking activities on the same terms and conditions as their non-bank-affiliated competitors,” wrote Paul Smith, senior counsel for the American Bankers Association. “These provisions also might discourage securities and insurance firms from becoming financial holding companies because the price, in terms of limits on merchant banking activities, might be too high.”

Bankers also stressed that the new Basel Accord’s reliance on internal models as a way of weighting risk was a more appropriate method than blanket higher capital standards.

That the proposal would impose “a capital charge applicable to equity investments based solely on their being equities represents the type of oversimplification that the” Basel Accord “seeks to remedy,” wrote Ronald C. Mayer, senior vice president and associate general counsel of J. P. Morgan Chase & Co.

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