Federal banking regulators are making subtle changes in their positions to protect their larger interests in the financial reform debate.

The Federal Reserve Board, which is pushing to become the umbrella regulator for diversified financial services companies, made the first move.

Testifying before a House Banking subcommittee last month, Fed Chairman Alan Greenspan conceded his agency does not need to oversee every holding company that owns a bank.

The deciding factor, he said, should be whether the failure of an affiliated bank would cause systemic problems. That means holding companies owning small banks likely would not need umbrella supervision while big banks would have to remain under the Fed's watchful eye-not a bad deal for the central bank.

Mr. Greenspan also said holding companies that do most of their business in insurance or securities affiliates may not require Fed supervision even if they own a bank.

"Let's be careful not to presume we need umbrella Fed supervision everywhere," Mr. Greenspan testified.

His argument appears aimed at reassuring executives at insurance and securities firms-and the lawmakers who support them-that the Fed is not trying to regulate their businesses.

"This is to toss people a bone and not look so greedy from a regulatory power standpoint," said Bert Ely, president of the bank industry consulting firm of Ely & Co. "It reinforces his argument that he is more concerned with systemic stability rather than regulatory turf."

To keep the charter it issues robust, the Office of the Comptroller of the Currency also has begun refining its arguments. The agency has been pressing for years to expand the activities national banks may conduct directly-rather than through Fed-supervised holding company subsidiaries.

Speaking recently to the American Enterprise Institute, OCC Chief Counsel Julie L. Williams said allowing banks to underwrite securities in a direct subsidiary will better protect taxpayers.

Numerous rules, she noted, prevent banks and holding companies from directly subsidizing securities underwriting subsidiaries.

But nothing stops a bank from increasing the dividends it pays to a holding company, which can then invest the money in its securities unit. Banks, however, are barred from transferring capital through dividend payments to an operating subsidiary.

Ms. Williams is trying to debunk one of the Fed's most potent political weapons, the argument that direct underwriting puts taxpayer dollars at risk.

Despite the posturing, observers said they don't expect either side will make much headway.

"I don't think financial reform will happen," said Karen Shaw Petrou, president of the industry consulting firm ISD Shaw Inc. "Congress has been unsettled by the Fed's arguments and unconvinced by the OCC's. What you get is a stalemate."

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