The New York State Banking Department will examine a controversial loan made by a New York unit of Fleet Financial Group to the 1992 U.S. Senate campaign of City Comptroller Elizabeth Holtzman, a state government source said.

The banking department, which regulates state-chartered banks, said it wants to determine whether Fleet's Long Island bank affiliate followed "proper loan guidelines" in making the $450,000 loan to the Holtzman campaign.

The review follows the release of a New York City Department of Investigation report that suggests Fleet Financial's securities subsidiary was invited to become a co-manager of the city's bond underwriting syndicate in return for the loan.

Possible Conflict

The report details possible violations of conflict-of-interest rules by Ms. Holtzman, who is fighting a bitter primary battle to be reelected as comptroller. It did not investigate possible violations of banking laws.

However, federal regulators and private bank lawyers said the report may lead to regulatory or law enforcement action against Fleet. It detailed the relationship between Ms. Holtzman--who denies any wrongdoing--and key executives of Providence, R.I.-based Fleet Financial, the holding company for Fleet Bank and Fleet Securities.

|Undesirable' Type of Loan

"We're confident we haven't violated any laws or regulations." said Thomas Lavelle, a spokesman for Fleet.

The New York City report said Fleet's Commercial Credit Policy Manual characterizes political loans as "undesirable."

The government source indicated that the State Banking Department has undertaken an examination to see if the loan followed standard guidelines.

"It really is a question of whether the loan was improper." said the official, who asked not to be identified.

The source refused to elaborate on what enforcement action, if any, the banking department can take. Investigators will likely "talk to some of these people" at the bank to determine why the loan "was done the way it was done," the source said.

The city's report said James P. Murphy, a vice president of Fleet Financial Group and the former administrative head of the New York State Bankers Association, lobbied bank executives to make the 450,000 loan. Mr. Murphy served on the fund-raising committee for Ms. Holtzman's failed U.S. Senate campaign in 1992.

Edward Fanning, executive vice president and senior lending officer at Fleet, advised Mr. Murphy that "this was an undesirable loan and that I was reluctant to get involved in it," according to the city's report.

It also described how Mr. Murphy introduced Ms. Holtzman and her key staffers to executives of Fleet Securities who wanted to expand the firm's role in city bond deals.

Ms. Holtzman still has not repaid about 200,000 of the loan. Fleet charged 7% interest, just one point above prime.

"There are any number of federal and state statutes that could have been violated by Fleet," said a banking lawyer who asked for anonymity. "If you made a below-market loan to get underwriting business, that's a very serious legal prolem."

A government regulatory official said FIeet may have violated the anti-tying prohibition of the Bank Holding Company Act, which says banks cannot make a loan approval contingent on purchases other services, such as underwriting.

Another source said a campaign contribution to a customer may violate restrictions on what a holding company may do to directly benefit a subsidiary. A campaign contribution to a customer could be a violation of that statute.

Mr. Gasparino is a reporter with The Bond Buyer, a sister publication of American Banker.

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