The Federal Reserve Board has embarked on a massive effort to revamp the rules that govern foreign bank operations in this country.

The initiative covers nearly every aspect of foreign bank supervision, from the applications process to interstate branching to enhanced powers for representative offices.

"We hope that the results will be a reduction in burden, improved efficiency, and lower cost to the industry," said Fed Governor Susan M. Phillips, who heads the central bank's regulatory committee.

The effort is drawing cheers from foreign bankers.

"All banks, domestic and foreign, agree that the U.S. has a complicated regulatory structure," said Lise M. Hafner, head of the Canadian Bankers Association's Washington office. "So any opportunity for it to be streamlined and thinned out is of benefit not only to the banks but to the consumers."

Ms. Phillips unveiled the Fed's strategy in a speech last week to the Institute of International Bankers, the trade group for foreign banks.

Regulation K, governing which foreign banks are allowed to enter this country, is one focus of the overhaul.

Currently, a foreign bank is required to derive at least half its income from banking and to conduct at least half its banking outside the United States. The restrictions are intended to prevent an overseas manufacturer from owning a U.S. bank.

The rule includes a quirk that is driving some foreign banks nuts. Reg K requires the foreign bank's banking business to occur within the bank. That hurts institutions that conduct business in affiliates of holding companies.

The Fed understands the problem and plans to propose a solution shortly, Ms. Phillips said. Most observers expect the Fed to eliminate this requirement altogether, although Ms. Phillips would not confirm this.

Ms. Phillips did say the Fed hopes to simplify some application forms used by foreign banks, for example, those used as notice of branch expansions here.

The central bank already has proposed making it easier for foreign banks to branch across state lines, including one plan to ease restrictions on mergers of foreign bank operations in more than one state. The Fed plans to finalize these rules shortly, according to Ms. Phillips.

Representative offices have become a particular regulatory challenge for the Fed, Ms. Phillips said. Smaller offices often limit their work to market research, while larger ones provide a full range of loan-production services, she said. The Fed will review its oversight to ensure it is not overregulating the small offices and under-supervising the larger ones, she said.

The Fed would like to do more to reduce the burden on foreign banks, Ms. Phillips said, but it can't act unless Congress approves pending regulatory relief legislation.

One measure would allow the Fed to grant a branch license to a foreign bank not subject to comprehensive supervision on a consolidated basis - the standard required under the Foreign Bank Supervision Enhancement Act.

The change would allow banks in developing countries, whose governments are just beginning to shape U.S.-styled regulations, to open in this country, she said.

Ms. Phillips also supported a measure that requires the Fed to charge foreign and domestic banks the same fees. Existing law will require the Fed to charge foreign banks more starting in 1997.

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