After four years of wrangling over new recourse rules, regulators are poised to require most banks securitizing loans to increase their capital reserves in the short-run.

But regulators are holding out the possibility that many of those banks will ultimately be able to lower capital after the agencies finish work on another, related regulation.

Bankers are asking regulators to hold off on the first rule until both can be implemented at once. This would eliminate much of the short-term boost in capital reserves that regulators envision.

David P. Apgar, the senior policy adviser at the Office of the Comptroller of the Currency, said in an interview that such a delay is unlikely because the second regulation is a long way from finished.

"We are moving as fast we can," Mr. Apgar said.

Bankers said they would rather deal with the regulatory changes all at once, rather than having to endure two separate transitions. They also said that, if done separately, they fear the regulators will not adopt the second phase, which is far more beneficial to banks.

At the same time, bankers urged regulators to amend numerous sections of both proposals.

All four banking and thrift agencies released the proposals for comment May 25. Comments were due on the plans July 25.

The first proposal contains two major changes from existing regulation.

It would affect banks that back securitizations with letters of credit and similar instruments. Banks issuing these instruments agree to absorb the risk of loss that another institution is exposed to. Under the current rules, the letter-issuing banks only hold capital against 8% of the amount of recourse. Under the new rule, letter-issuers must hold 8% of the total amount of assets sold off. This would substantially boost the letter-writing bank's capital requirements.

The second part ,corrects an anomaly that has required banks to hold more in capital reserves than they could lose if a deal went sour.

"The current rules don't allocate capital where most of the risk resides," OCC's David P. Apgar said. "The whole purpose of this is to ensure capital requirements of banks reflect the risks." The second plan, which is an advanced notice of proposed rule-making, goes several steps further. It tries to make the capital reserve rules fairer by correlating the reserve requirement with the risk involved.

Fed and OCC officials explain the advanced rule proposal would work like this: A bank pools its mortgages. It then sells them in several parts, with part "a" having first priority over the incoming revenue and part "d" having last dibs.

The advanced rule. proposal would reward the institution holding part "a" with lower capital requirements because it's more likely to recoup its investment than the institution holding part "d", which must wait for the other three to collect their money before it sees a penny.

The advanced rule also would condition these capital reserve reductions on the quality of the security. In cases involving unrated securities, the regulators would create their own rating.

NationsBank had its own suggestion -- scrap beth proposals and leave the current rules in place.

"This level of micro-management by the agencies is unjustified generally, and in particular in an area of banking that has experienced no losses since its inception," wrote Patrick M. Frawley, the director of the bank's regulatory relations group.

Mr. Apgar agreed that banks have handled themselves responsibly so far. But, he said the regulators fear that one or two careless institutions could enter the market and abuse the less stringent capital requirements. That could lead to systemic failures, as the abusers default on agreements with otherwise healthy institutions.

While many of the other commenters said they only wanted minor changes, their suggested adjustments would gut the proposal. For example, Citibank N.A. Associate General Counsel Stephen E. Dietz said Citibank, which expressed broad support, has a problem with the advance notice. In situations where a group such as Moody's has not rated the security, the regulators must create their own rating. Mr. Dietz said Citibank prefers to have the regulators rely on the bank's internal risk-based analysis instead.

However, this regulator-created rating system is integral to the advanced notice because it determines how much a bank can reduce its capital.

Several commenters, including a coalition of a dozen domestic and international banks, urge.d the agencies to replace a regulator-created accounting rule included as part of both proposals with a generally accepted accounting principle.

Donna Fisher, the American Bankers Association's director of tax and accounting, said GAAP's more lenient capital requirements are sufficient.

GAAP bases capital requirements on an institution's internal risk assessments while the regulators create a blanket capital requirement that is less flexible than the banks want.

Ms. Fisher said banks should be allowed to follow GAAP because it will give them more capital to use elsewhere. She also said that a fear by regulators that banks will fudge their internal risk assessments is unfounded because outside auditors and examiners will review their conclusions.

Several institutions expressed a more basic fear--the proposal could let foreign competitors steal business.

Roman J. Gerber, executive vice president of Bank One Corp. of Columbus, wrote in a July 22 letter that stricter capital requirements attached to direct credit substitutes could force U.S. banks out of the business because foreign banks could issue credit substitutes without holding as much capital in reserve.

Mr. Gerber wrote that the problem stems from the regulators' decision to equate recourse with direct credit substitutes, which are agreements by institutions to cover other entities' recourse liabilities. He said the two instruments differ because recourse arrangements, unlike direct credit substitutes, do not give a party the chance to recoup losses it is forced to cover.

Mellon Bank agreed. The Pittsburgh-based institution's general counsel, Michael E. Bleier, wrote that "almost any alternative" is preferable.

First National Bank of Chicago had a suggestion for Mr. Apgar and the other regulators-- accept that this is a complicated issue and hold a public hearing so banks can express their views

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