The Federal Reserve Board today is expected to abolish nearly two dozen firewalls that make it difficult for bank-affiliated section 20 units to compete against securities firms.

The changes are expected to let banks: extend credit to companies that purchase securities from underwriting affiliates, offer letters of credit and credit enhancements in conjunction with underwritings, and buy stocks from related securities firms.

"This would be very good for business," said Shiv V. Krishnan, president of KeyCorp's section 20 Key Capital Markets. "It would reduce the artificial restrictions that commercial banks have had to deal with. It would enable us to in return reduce the cost of delivering services to corporate clients."

Also today, the banking and thrift agencies are expected to release a proposed overhaul of the risk-based capital rules for assets sold with recourse.

Comptroller of the Currency Eugene A. Ludwig approved the plan Wednesday, but his agency refused to release it. The Fed will consider the move at its meeting this morning.

The agencies in May 1994 released an advance notice of proposed rulemaking that would use credit ratings to determine risk-based capital requirements for assets and securities sold with recourse.

Officials from several agencies declined to discuss the proposal, but observers expect it to raise capital requirements for recourse arrangements involving letters of credit, warranties, and other direct credit substitutes.

The Fed's firewall proposal had been put on hold in March after Senate Banking Committee Chairman Alfonse M. D'Amato threatened to introduce legislation to enact the barriers into law. "I'm prepared to offer piecemeal, single-shot legislation dealing with what I consider to be dangerous overreaching," the New York Republican said at a March 20 hearing. A spokesman for Sen. D'Amato declined Wednesday to comment.

The Securities Industry Association also opposes eliminating the firewalls, saying the Fed should defer to Congress rather than try to rewrite securities laws. "We should have comprehensive legislation by Congress," association spokeswoman Margaret Draper said Wednesday.

But banking industry officials argued that the changes would eliminate duplicative, expensive, and unnecessary restraints on their ability to offer one-stop shopping to corporate clients.

For instance, the Fed is expected to eliminate a firewall that prevents banks from extending credit to a customer of an affiliated underwriting unit. Bankers complained that the restriction prevents customers from easily moving between the bank loan market and the short-term commercial paper market.

The Fed also is expected to allow holding companies to use repurchase agreements to fund section 20 affiliates. Currently a section 20 must enter into repurchase agreements with unrelated companies to raise funds.

The proposal also is expected to permit holding companies to count all their investments and loans to section 20 units toward capital requirements. The Fed has said these are no different from investments made in other subsidiaries, which qualify as capital.

"There have not been any problems with the operation of section 20s," said Richard M. Whiting, general counsel at the Bankers Roundtable. "I would expect them to finalize the proposal as it was put out."

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