States: Fed Has Enough Power Now

NEW YORK - State banking regulators say legislation to broaden the Federal Reserve's powers over foreign banks will not prevent problems of fraud such as those at the seized Bank of Credit and Commerce International.

The legislation, drafted by the Fed, is part of a draft bank reform bill published by the Senate Banking Committee.

Proposals giving the Fed more power to regulate foreign banks would almost certainly enhance its standing among international regulatory bodies, state regulators say. But some fear this would be at the expense of states' own regulatory power. The Fed, they say, already has power to open and shut foreign banks, including BCCI.

A Plea for More Power

Virgil Mattingly, the Fed's general counsel, said the Fed now has "zero authority" over setting up foreign agencies like BCCI in individual states, and no power to close them.

Mr. Mattingly says the legislation offers no guarantee against the sort of fraud believed to have been practiced by BCCI, but the bill "gives us the authority to try to make sure foreign banks operating in this country are responsible."

If the new legislation had been in place, he said, BCCI would never have been able to open agencies that were later involved in international laundering of drug money.

Among the BCCI operations seized July 5 in an international crackdown by regulators were offices in New York and California. Another outlet in Florida was closed in 1990 after the bank was indicted on money-laundering charges, on which it entered a guilty plea.

Regulators Worried

Meanwhile, state authorities say the new bill, the Foreign Bank Supervision Enhancement Act, expands upon the International Banking Act of 1978, which for the first time gave the federal government some authority over foreign banks. Previously they were subject only to state authorities' oversight.

The latest legislation would allow the Fed to become more of "an umbrella regulator," said one official at the Conference of State Bank Supervisors in Washington. He added that some states complained the new bill is being pushed through Congress with little discussion. By contrast, the 1978 Act took years to pass. And some states are critical that the Fed is not making wise and full use of its existing powers.

Virginia Sounded Early Alarm

In the case of BCCI, for example, a regulator in the Virginia says the Fed went ahead to approve a purchase of shares in a Washington-based bank by Arab investors, who also held shares in BCCI.

As early as 1979, Sidney Bailey, commissioner of financial institutions for Virginia, advised the Fed to turn down the application for a stake in what is now First American Bank-shares.

The investors later defaulted on loans from BCCI and BCCI took over the shares in First American.

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