The Federal Reserve's plans to expand the powers of U.S. banks overseas may have fallen victim to the financial modernization battle.

Fed officials, including Governor Susan M. Phillips, have promised to propose the revisions to Regulation K for six months. Congress requires the Fed to review the rule every five years; the current revision is already two years late.

The delay has convinced bankers, trade group officials, lawyers, and consultants that the Fed is intentionally stalling the Reg K rewrite to avoid political embarrassment.

The proposal is expected to give the overseas units of U.S. banks more authority to buy commercial companies, underwrite securities, and offer insurance. The problem: all these activities occur either in the bank or in a bank subsidiary.

In the debate over financial modernization, the Fed has argued repeatedly to Congress that institutions should enter new domestic businesses through holding company affiliates, rather than directly through the bank as advocated by the comptroller of the currency.

Observers said the Fed was worried that the Regulation K proposal would bring more attention to this apparent policy contradiction. So the Fed has decided to sit on the proposal until either Congress approves a reform bill or gives up for this session, they said.

Ms. Phillips said the Fed was not worried about politics. "That is not a factor," she said.

Rather, she said work on Reg K has been squeezed out by other issues. In addition, Ms. Phillips said Reg K was highly technical, requiring more time than usual to review. "This is just very complicated," she said. "That is the reason for the delay."

Industry observers, however, are not buying that explanation.

"They need to square their positions domestically and internationally," said Richard M. Whiting, general counsel at the Bankers Roundtable. "It is more than coincidental that they are lagging behind on Reg K while bank power issues are on the political front burner."

"There is a philosophical difficulty the Fed is struggling with," according to a lawyer at a large bank. "The Fed doesn't want Congress to say, 'How can you say it is unsafe and unsound to do things in operating subsidiaries when you let banks do the same things overseas?' "

"If the Fed liberalizes, then that plays into the comptroller's hands," another lawyer said. "It would let the comptroller say he just wants to let U.S. banks do domestically what they do internationally."

The industry expects the rewrite to remove size limits on securities underwriting by overseas units. This restriction has prevented U.S. banks overseas from winning contracts for initial public offerings, the lawyer at the large U.S. bank said.

The Fed also is expected to ease rules limiting direct bank investments in commercial firms. Currently, banks may invest up to $25 million overseas without Fed approval. That amount is expected to increase, although observers are unsure how high the Fed will go.

Finally, bankers expect the Fed to ease paperwork requirements, replacing some formal applications with notices.

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