WASHINGTON -- Mexican bank advocates are crying foul over the Federal Reserve Board's decision Wednesday to let seven U.S. banks set up shop there while continuing to debate whether Mexican institutions can expand here.

"The overall appearance of the thing is, here you have Nafta and the American banks going in, and you have the appearance that the Mexican banks are not," said a foreign bank representative who requested annonimity.

That's not the way the North American Free Trade Agreement, was supposed to work, this industry spokesman said.

Seeking Permission

The representative said a half-dozen or so Mexican banks have applied to the Fed for permission to expand their U.S. operations. Many currently have offices here, but don't provide complete banking services.

Under one provision of the Nafta, hanks can open subsidiaries in the other'S country. But a 1991 law-requires the Fed to certify that the bank's home country adequately supervises its foreign operations.

The foreign bank representative said Fed and Mexican officials have been meeting to determine what Mexican regulators must do to bring their supervision levels up to U.S. requirements.

No Word on Talks' Progress

A Fed staffer confirmed that talks are taking place, but refused to say where they stand.

The staffer said that once the central bank approves the first application, the others need only gain the approval of Mexican regulators to win the Fed's blessing.

The foreign bank representative said bankers are surprised that the Fed has not yet approved any of the Mexican bank application, especially because the country's banking industry has shown impressive strength recently.

"These are not chicken-feed banks," he said of those who applied, including Bane0 Nacional de Mexico.

U.8. Giants

The American banks that applied to open operations in Mexico aren't small either.

Citibank Oveseas Investment Corp., Morgan Guaranty International Finance Corp. and Chemical International Finance Corp. all received permission to form financial holding companies in Mexico.

Republic National Bank of New York, Chase Manhattan Overseas Banking Corp., Nationsbank Overseas Corp. and BankAmerica International Financial Corp. got won approval to open commercial hank subsidiaries there.

A Citibank Spokesman said the bank plans to take advantage of Mexican law that allows institutions to operate brokerage, leasing, and banking services from the same institution.

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