The Federal Reserve is pressing U.S. units of Japanese banks to increase their loan-loss reserves, confirmed senior executives at some affected banks.

Specifically, the banks are being urged to take provisions against possible losses on loans to U.S. subsidiaries of Japanese companies, the executives said.

The Fed pressure could force a showdown on the long-running jurisdictional battle over loan-loss provisions by foreign branches.

Japanese bankers disagree that larger reserves are necessary. But in any event, they argue, Japanese regulators - not the Fed - should call the shots.

Japanese bankers complain that they are in the middle of a regulatory squabble.

"It's not the kind of problem we can solve on an individual basis," said a senior Japanese banker in New York who asked not to be identified. "It has to be discussed between regulators in both countries, but nobody is taking any initiative."

The Japanese bankers say the issue is whether loss reserves should be held at the parent company or the subsidiary. Provisions for Japanese bank branches around the world have customarily been taken by the parent company.

"We don't set aside for loan losses at individual branches in Japan, so why should we here?" asked the same banker. "It's natural to centralize reserves."

His remarks follow a report last week in the Japanese newspaper Nihon Keizai Shimbun that the Fed had asked Japanese bank branches to make loan-loss provisions of 20% to 30% of their nonperforming loans in the United States.

How Solid Are Borrowers?

According to the report, the Fed is particularly concerned about lending by Japanese banks to U.S. units of Japanese companies that are either losing money or barely making a profit.

Bankers confirmed the report, but declined to provide any estimate of the loans that have been called into question or the size of the reserves that might have to be set aside.

They added that it was part of a continuing dispute with Federal regulators over whether Japanese banks must keep local loan-loss provisions.

Bankers also disclosed that the problem was mainly in California, where Japanese bank agencies, branches, and subsidiaries hold nearly 25% of the market.

Since the unfolding of the Bank of Credit and Commerce International scandal last year, Federal regulators have been aggressively moving to apply the same rules to foreign bank branches that apply to U.S.-chartered banks.

As of mid-1991, 16 Japanese banks in California ranked among the top 25 foreign bank agencies in United States, with more than $20 billion in commercial and industrial loans on their books.

The banks include Industrial Bank of Japan, Ltd., Long-Term Credit Bank of Japan, Mitsui Trust and Banking Co., Dai-Ichi Kangyo Bank, and Sakura Bank Ltd.

"The Fed is paying more attention to credit-related issues," said said a New York based lawyer who advises foreign banks. "They expects U.S. branches and agencies [of foreign banks] to make their own independent credit analysis and have their own sources of repayment."

Fed officials in Washington and San Francisco were unavailable, while a spokesman for the Federal Reserve Bank of New York declined to comment on the Japanese newspaper report.

The controversy over unsecured lending to U.S. units of Japanese companies is likely to prove particulary difficult to resolve because of strong unwillingness by Japanese banks and corporations to change their traditional banking practices.

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