WASHINGTON - Eight members of the Senate Banking Committee on Wednesday sharply criticized the Federal Reserve Board's plan to set a tough capital requirement on merchant banking investments.

"It seems to us that an inflexible 50% capital requirement will discourage both merchant banking participation and refinement of existing capital allocation models based on risk," the lawmakers wrote in a letter to Fed Gov. Laurence H. Meyer.

The Gramm-Leach-Blilely Act of 1999 specifically outlines new merchant banking powers, the lawmakers said. "We therefore take great exception to several provisions of the proposed rules which, in our judgment, go beyond the intent of the legislation."

The letter also criticized the Fed's decision to cap an institution's merchant banking activities at $6 billion or 30% of assets, whichever is lower. The Fed and Treasury Department set the investment cap March 17 while the Fed proposed the capital requirement that day. A final ruling on the capital plan is pending.

The senators signing the letter were Republicans Robert E. Bennett of Utah; Rod Grams of Minnesota; Jim Bunning of Kentucky; Chuck Hagel of Nebraska; and Michael Crapo of Idaho. The Democrats were include Sens. Jack Reed of Rhode Island; Charles E. Schumer of New York; and John Edwards of North Carolina.

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