The Federal Reserve Board on Wednesday will propose allowing banks to offer limited credit enhancements to customers who buy underwriting services from securities affiliates.

Currently, the Fed does not allow banks to offer any letters of credit to customers of their holding company's section 20 subsidiary.

The Fed also will propose the elimination or refinement of 19 other firewalls that separate commercial and investment banking, targeting unnecessary or duplicative restrictions.

Industry officials are eagerly awaiting the Fed proposal, noting that many of the firewalls are anachronistic and expensive to comply with. "This is extremely important," said Sarah A. Miller, general counsel to the ABA Securities Association. "These firewall provisions have served as a deterrent to some banks getting into the underwriting business."

"Unnecessary restrictions should be removed," agreed Melanie L. Fein, a partner at the Washington law firm of Arnold & Porter. "They impair the ability of bank holding company section 20 units to compete on a level playing field."

Details of the proposal will not be released until Wednesday. But sources familiar with the document said the Fed also is expected to propose easing restrictions that prevent banks from lending to companies so they can pay off bonds issued by an affiliated section 20 unit. Bankers have complained that this restriction prevents customers from switching between the bank loan market to the short-term commercial paper market.

The Fed also is expected to propose allowing banks to extend some collateralized loans to section 20 units. Loans to section 20 units are currently prohibited.

Some firewalls could disappear completely. For example, the Fed is expected to drop a ban on loans to consumers to purchase securities from section 20 units. A Securities and Exchange Commission rule already bars this practice.

Most of the changes were previously included in a Glass-Steagall reform bill introduced last year by House Banking Committee Chairman Jim Leach. The bill failed to make it to the House floor for a vote.

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