In an unusual lobbying effort on behalf of their international competitors, American banks are trying to dissuade the Treasury Department from recommending a restriction on foreign banks' branching rights.

Senior banking executives said last week they hope to dissuade outgoing Bush administration officials from recommending that branching be allowed only if the non-U.S. banks set up separately capitalized subsidiaries.

The U.S. bankers fear such a limitation will invite retaliation by regulators in other countries, affecting U.S. banks' operations there. They also argue that restrictions on the foreign banks in the U.S. could trigger a domestic credit crunch.

Report Due in December

A report on the policy, to be jointly issued by Treasury and the Federal Reserve Board, was mandated last year in the Foreign Bank Supervision Enhancement Act. It is due to be submitted to the Senate and House banking committees by Dec. 19.

"We've made strong representations to Treasury that the roll-back [of branching rights] is a bad idea for U.S. markets and will be counter-productive," said Thomas L. Farmer, general counsel for the Washington-based Bankers Association for Foreign Trade .

That trade group and the Association of Reserve City Bankers are spearheading the lobbying effort in support of foreign banks.

Among the companies that have been represented in the talks are Chemical Banking Corp., Citicorp, J.P. Morgan & Co., Chase Manhattan Corp., NationsBank Corp., Bank of Boston Corp., Comerica Inc., and Northern Trust Corp., said sources familiar with the effort.

Fed-treasury Split Seen

Bankers who have spoken with Treasury and Fed officials said they have gotten no indication what the report will say. A Treasury spokesman declined to comment.

Well-informed sources said a split has developed between the Fed and Treasury.

Fed officials are reportedly opposed to any move to change operating requirements for foreign banks. But Jerome H. Powell, Treasury under secretary for finance, believes foreign banks should operate through locally chartered, separately capitalized holding companies if they wish to expand further in the U.S. and gain new banking powers.

U.S. bankers have become increasingly concerned about the joint Fed-Treasury report as pressure has mounted in Congress to tighten regulation of foreign banks. The pressure followed international scandals involving the Atlanta branch of Banca Nazionale del Lavoro of Italy and Bank of Credit and Commerce International of Luxembourg.

|A Very Big Sword'

In a report on BCCI issued on Sept. 30, Senators John Kerry, D-Mass., and Hank Brown, R-Colo., asked that foreign banks be required to operate through separately capitalized U.S. holding companies.

"Foreign banks feel this is a very big sword hanging over their head," said John More, counsel with the Washington-based law firm of Wiley, Rein & Fielding.

Foreign banks last year provided $202 billion in business loans, or 32% of total borrowings by U.S. corporations from banks.

Taking into account the extra loans to U.S. borrowers that were booked in offshore centers like the Cayman Islands, foreign banks held an even greater share of the U.S. market.

According to estimates by the Federal Reserve Board released in June, foreign banks had $196 billion more in loans to U.S. borrowers on their books in offshore offices, giving them 45% of the U.S. corporate lending market.

|Our Fingers Are Crossed'

Foreign banks have stayed out of the lobbying effort, for fear of triggering more negative sentiment in Congress.

"Our fingers are crossed and we're hoping for a favorable outcome," said a spokesman for the Institute of International Bankers, a New York based-association of foreign banks.

However, U.S. bankers argue that changing the operating structure of foreign banks would not be in the economic interests of the United States.

Far Lower Lending Limit

They point out that a separately capitalized banking subsidiary would have a far lower U.S. lending limit than does a branch, which bases its lending limit on its parent's capital.

"We're talking about big, highly integrated international markets," Mr. Farmer said. "Both U.S. banks and the U.S. business community need the participation of foreign banks in order to maintain liquidity in this market."

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