WASHINGTON - The Federal Reserve Board is drawing grudging praise from representatives of foreign banks for amending a rule that determines which institutions may engage in expanded activities under the Gramm-Leach-Bliley Act.

A year ago, the Fed angered foreign bankers when it released an interim rule governing how banks could become financial holding companies - a move necessary for them to engage in new activities permissible under the 1999 law.

To qualify for financial holding company status, the interim rule said, foreign banks would have to satisfy a 3% leverage ratio of Tier 1 capital to total assets and maintain a "satisfactory" management rating at each U.S. office. Some observers felt those requirements would have left open the possibility that the Fed would evaluate the management of a bank's non-U.S. operations, something traditionally left to the home-country regulator.

Foreign banks objected to the leverage ratio in particular, because no such requirement is imposed by their home country regulators or by international capital rules established in the Basel accord.

John B. Richardson, deputy head of the European Commission delegation here, voiced a reaction common to many European bankers. "It looks a bit like" the Fed is "turning away from everything that we have constructed multilaterally over the last years … toward an approach that gives the Fed much more discretion over everything," he said in a March interview.

The Fed excluded the leverage requirement from it final rule, issued on Dec. 21, noting that it "may have limited value … because of the significant differences between U.S. and foreign banking balance sheets." However, it reserved the right to use a foreign bank's leverage ratio as a signal that the institution "should receive further scrutiny in determining whether the bank has capital comparable to a well capitalized U.S. bank."

Industry observers were not surprised at the move.

"The Fed was under a significant amount of pressure to change the rule," said Satish M. Kini, a partner with the law firm Wilmer, Cutler & Pickering who has represented the Swiss Bankers Association. "The modification is not surprising; it represents a compromise position. They have not taken leverage off the table, but said it is one issue that the Board and staff will consider."

Lawrence R. Uhlick, executive director of the Institute of International Bankers, praised the Fed's decision. "This action will promote the harmonization of international risk-based capital standards, including the ongoing efforts to achieve a revised risk-based capital framework," he said.

The Fed also backed off on the requirement that every branch of a foreign bank operating in the United States be considered well-managed in order for the holding company to retain the same status. Foreign banks had blasted the rule as grossly unfair, because U.S. banks are not subject to the same level of supervision.

"Citibank's Madison avenue branch is not tested separately to see how its branch manager does his job," said Robert L. Tortoriello, a partner at the New York law firm Cleary Gottlieb, Steen & Hamilton.

The final rule instead lets foreign banks' management status to be assessed on a composite, nationwide basis.

The central bank addressed another complaint by clarifying the extent to which it will examine the non-U.S. operations of foreign banks. When a foreign bank applies for financial holding company status in this country, the Fed will not independently examine its operations overseas but will seek the consent of the home country supervisor to permit the institution to engage in expanded activities.

"This formulation," the central bank notes, "is based on guidelines issued by the Basel Committee on Banking Supervision."

Mr. Tortoriello said that while it is not perfect from foreign bankers' perspective, the new rule goes a long way toward making financial holding company status more attainable and more appealing. "The Fed didn't move 100% of the way foreign banks would have liked, but it did make some very substantial incremental steps," he said.

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