WASHINGTON - Federal regulators have delayed the release of new merchant banking rules since late last week while debating the size of capital requirements and dodging bankers' heavy opposition to the special charges, industry sources said Tuesday.

The issue has become so thorny that the Federal Reserve Board and Treasury Department are expected to split off the capital question and simply issue a rule expanding merchant banking authority in line with the Gramm-Leach-Bliley Act of 1999. The rule, however, is not expected to be issued until Thursday at the earliest.

The separate capital proposal is likely to suggest that financial holding company units retain reserves equal to as much as 50% of the value of their merchant banking investments. It is also expected to offer alternatives, and ask the industry to weigh in with more suggestions.

But that probably will not satisfy banking organizations such as Citigroup Inc., Chase Manhattan Corp., and Bank of America Corp., which consider broader investment powers one of the prime benefits of Gramm-Leach-Bliley. These companies, and groups such as the Financial Services Roundtable and New York Clearing House, have argued that current capital requirements are sufficient and that anything more would give nonbank competitors an advantage in financing high-tech firms and other start-ups.

"There is no reason to separate out this particular investment authority and require separate capital rules," said Robert J. Kabel, legislative counsel for the Bank Private Equity Coalition. The group represents five of the largest holding companies that have engaged in limited merchant banking for years. None of these companies have lost money on these investments, which are relatively small and "well diversified," said Mr. Kabel, a partner of the Manatt, Phelps & Phillips law firm here.

Gary Gensler, the Treasury's under secretary for domestic finance, denied in an interview Tuesday that disagreements or controversy have delayed the merchant banking rule. He noted that the issue is complex and that regulators also had to issue a string of rules over the past week to coincide with Gramm-Leach-Bliley taking effect March 11.

"We had many other things we were working on," Mr. Gensler said. "There is really nothing to be read into it. There is absolute consensus between the Federal Reserve and the Treasury on what we are going to put out."

While some sources have cited deadlock between the Fed and Treasury, more industry observers are blaming the delay on divisions among staff members at the Fed, which is the lead agency on the capital requirements. These sources attribute the tension to an age-old rivalry within the central bank: the clashing viewpoints of cautious bank supervisors and market-oriented research economists.

"I don't think they have decided," said Gilbert T. Schwartz, a partner of the Schwartz & Ballen law firm here. "There are some philosophical battles going on internally."

As a result, industry officials said, regulators have launched countless trial balloons and fueled even more speculation that has led to significant confusion among industry lawyers and lobbyists. About two weeks ago the Fed floated the idea of a 100% capital requirement, but banking executives squawked.

"The folks in the industry said that would kill off everything we do," Mr. Kabel said.

As a result, experts expect the Fed to propose that banks set aside as capital 30% to 50% of an investment. New York Clearing House general counsel Norm Nelson - who along with officials from some of the group's members met with Fed officials last week - said that 50% sounded higher than he would have predicted but is "within the realm of possibility."

Regulators have also been testing other scenarios that could be included among the alternatives in a proposal. For instance, the Fed is considering a risk-based approach under which merchant banking investments would receive a "200% risk weighting." That would translate to a 16% capital requirement, or twice what is currently required for most loans.

Among other issues of concern to bankers is whether capital charges will be based on the value of the original investment or its appreciated value.

Despite the controversy over capital mandates, regulators appear to have responded to industry concerns about how long they may hold merchant banking investments. The law requires that these investments ultimately be resold, but set no specific time limit.

Industry officials feared regulators would impose a strict time frame, but sources said that the rule will be flexible. Regulators are likely to step up oversight after a set period, say within five to 10 years, and require companies to explain why they are still holding an investment and when they plan to sell it. They are expected to reserve the right to force a divestiture, but on a case-by-case basis.

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