The Federal Reserve Board has warned the Office of the Comptroller of the Currency that allowing national banks to develop real estate could cause a financial debacle akin to the 1980s thrift crisis.

In a comment letter this week, the Fed urged the OCC to reject an application by NationsBank to enter the real estate development business through a direct operating subsidiary.

The power to develop property would be "incompatible with sound banking" and could expose banks to "greater potential losses," Fed Secretary William W. Wiles wrote.

"Approval would take national banks down a road that Congress has historically barred and that could very well lead to serious financial consequences for the banking system and ultimately the taxpayer," Mr. Wiles said.

The thrift crisis testifies to the "imprudence" of mixing banking and real estate development, according to the letter. "The board believes that it would be unwise to risk repeating this experience with the national banking system."

Besides the Fed, the National Association of Realtors and dozens of Realtors from Arizona to Florida flooded the OCC with letters of opposition.

The Fed and the realtors similarly argued that financial institutions that lack the necessary expertise have suffered huge losses in real estate ventures. Expanded powers would put national banks in competition with their borrowers and could create conflicts of interest, they added.

Banks with development subsidiaries could deny loans to a competitor, misuse proprietary information on competitors who apply for loans, or favor projects that complement their subsidiaries, opponents said.

"This is opening the door too far for the banking business," wrote realtor Lynn Waller of Cadiz, Ky.

The Fed's response was the latest volley in an ongoing turf battle with the Comptroller's Office. While the Fed wants new activities to be housed in holding company units, the OCC contends banks should be able to offer new products and services directly.

In March, the lead bank of Charlotte, N.C.-based NationsBank Corp. asked the OCC for permission to develop property and to finance real estate leasing through direct operating subsidiaries. Currently, banks may not develop real estate, and only holding company affiliates may engage in lease financing.

The two applications were the first under the OCC's controversial "op- sub" rule, which became effective Dec. 31.

The American Bankers Association and America's Community Bankers supported NationsBank's applications, saying the operating subsidiaries would be well-capitalized and separate from the bank. They noted that thrifts can finance leases and have successfully developed real estate through subsidiaries.

"The NationsBank operating subsidiary proposals provide adequate safeguards against imprudent investment," wrote Robert R. Davis, ACB's director of government relations.

Supporters defended the NationsBank applications as modest.

For instance, NationsBank wants permission to build a 45-unit condominium near a NationsBank office under construction in Charlotte and said it would ask the OCC for permission for each future development.

Considering NationsBank's precautions-such as limiting all loans, investments, and advances to its real estate subsidiary to 2% of Tier 1 capital-development activities will pose "little additional risk," wrote James D. McLaughlin, the ABA's director of regulatory and trust affairs. Lease financing as proposed by NationsBank would be no riskier than a secured real estate loan, he added.

"It would be difficult to imagine how an applicant might limit a proposal more than NationsBank has done here," wrote Julius L. Loeser, vice president and senior counsel for Wells Fargo. Banks are well aware of the risks surrounding real estate, he said, and could use their development powers to improve low-income communities where they operate.

But the Fed and realty interests fear the OCC will create a slippery slope.

"Our chief concern is that the approval of NationsBank's applications will lead to continued and expanded real estate development and property management activities by NationsBank and other banks," said Thomas Jefferson 3d, president of the Virginia Association of Realtors.

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