Industry officials and regulators are urging the Federal Reserve Board to withdraw a proposal that would place new restrictions on bank subsidiaries.

The plan would be unnecessary and too broad, according to comment letters filed with the Fed last week.

"The Fed's position distorts the (law) in order to permit the Fed to meddle in matters which are already regulated by the primary bank regulators," said Dennis E. Nixon, president of International Bancshares, Laredo, Tex. "The Fed should not be permitted to add another layer of regulatory compliance."

"The industry is in desperate need of financial modernization and regulatory simplification," added Benjamin W. Rawlins, chairman and chief executive of Union Planters Corp., Memphis. "This proposal goes in the opposite direction."

The proposal, issued in July, drew an unusually negative response from the 16 commenters whose letters were available to the public Monday. However, observers said they doubted the Fed would be persuaded to withdraw or substantially modify its proposal.

"They have been pretty aggressive with their views on this topic, and they haven't seemed to pay too much attention to what the other regulators' worries are," said Karen Shaw Petrou, president of ISD/Shaw Inc. A Fed spokesman said it was difficult to tell when the agency would act on the proposal.

The proposal would apply sections 23a and 23b of the Federal Reserve Act to bank subsidiaries engaged in activities that their parents may not undertake.

Section 23a restricts bank investments in subsidiaries to 20% of the parent company's capital, with no single unit getting more than 10% of capital. Section 23b requires that all deals be conducted at arm's length, which means the parent cannot provide discounted loans or other perks.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency already are able to protect banks from risky activities in their subsidiaries, commenters argued.

"No evidence exists that these measures of other regulators have been evaded or that risks to individual institutions or the banking system have increased from transactions covered by the board's proposal," according to a joint letter from the American Bankers Association, the Consumer Bankers Association, and the Bankers Roundtable.

Other banking and thrift regulators panned the Fed proposal.

The plan fails to recognize that a bank subsidiary engaging in activities as an agent poses far less risk to the parent bank than a unit that undertakes a business as principal, argued Comptroller of the Currency Eugene A. Ludwig.

"Too broad a brush may catch transactions that are not subject to the risk at which the restriction is aimed," Mr. Ludwig said. "Agency activities generally pose little, if any, safety and soundness concerns to the parent bank."

The new restrictions would hamper the FDIC's ability to supervise the activities of state banks and would stifle their regulators' ability to authorize new activities for state bank subsidiaries, said acting FDIC Chairman Andrew C. Hove.

"The proposal ... limits the FDIC's ability to properly control risk to the insurance funds as intended by Congress," Mr. Hove said.

The plan would place an unnecessary burden on federal thrifts, which already face several restrictions on investments in their subsidiaries, Office of Thrift Supervision Director Nicolas P. Retsinas said.

"Because the board cannot waive the ... restraints on savings associations, we do not believe it is possible for this rule, as proposed, to achieve the board's goal of equal treatment of all regulated depository institutions," Mr. Retsinas said.

Mr. Retsinas added the rule would trample the agency's recent overhaul of lending limits, investment authorities, and capital requirements with regard to subsidiaries.

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