Mayor David Dinkins of New York recently led a trade and investment mission to Europe, mainly to promote the city to foreign bank executives. He plans a similar trip to Japan.

Though audiences in London, Paris, and Frankfurt gave a cordial reception, they expressed a growing reluctance to expand their commitments to New York, where most of their U.S. activities are based.

The bankers emphasized that their hesitancy was not due to failures by the Dinkins administration or to any lack of business opportunities. Instead, they, cited Washington's harsher legislative and regulatory stance - which many call discriminatory - toward foreign banks.

Power to Retaliate

Unless Congress and the Bush administration heed these sentiments, the international reputations of New York and other U.S. financial centers will be tarnished. Disinvestment - with the loss of valuable jobs, credits, and know-how - could result.

Lawmakers and officials, addressing the need to enhance U.S. banks' international competitiveness, have responded with stricter measures directed at foreign rivals.

The Fair Trade in Financial Services bill, sponsored by Senate Banking Committee Chairman Donald Riegle, D-Mich., would permit retaliation against units here of foreign financial concerns whose countries deny U.S. banks equal access. The measure has the support of the Treasury Department.

The bill is aimed mainly at Japanese banks, whose holdings here far surpass those of American counterparts in Tokyo because of legal and informal obstacles in Japan.

Following the BCCI and Banca Nazionale del Lavoro scandals, Congress passed the Foreign Bank Supervision Enhancement Act to stiffen examination and enforcement for foreign-owned operations.

The law, recommended by the Federal Reserve, formalizes mandates already in existence. It also underscores the desire of politicians and regulators to prevent wrongdoing like that perpetrated at BCCI and Lavoro.

Response to Scandal

When the manager of Lavoro's Atlanta branch admitted criminally diverting funds that enabled Iraq to purchase weapons for its buildup before the Gulf War, House Banking Committee Chairman Henry Gonzalez, D-Tex., reacted by introducing a bill to punish foreign bank violations of U.S. export control provisions.

Criticizing the Italian government's "unfair subsidies" to the state-owned Lavoro bank, he inserted a clause that would restrict the activity of such "taxpayer-underwritten" institutions to basic financing of trade.

In the House-Senate conference on the renewal of the Defense Production Act, both banking chairmen also pushed to subject international takeovers of domestic banks to review by the high-level interagency Committee on Foreign Investments in the United States. Such screening is essential to preserving economic security, they argued.

The committee now monitors only sensitive industrial acquisitions.

Finally, under last year's failed modernization effort, Congress only belatedly rejected an administration provision that would have required foreign deposit-takers to close their branches and establish separately financed subsidiaries for U.S. operations.

Change in Status sought

Under the international Banking Act of 1978, these units, with their parents abroad, were considered holding-company equivalents whose capital is fully accessible to both entities. The revised approach would parallel the standard for U.S. banks, despite the difference in American and European legal structures.

While the proposal was dropped, an amendment was passed that ties new retail activity to incorporation of subsidiaries and directs the Treasury to complete an official study of the issues of branch versus subsidiary and of capital requirements.

In a separate move in response to bailout decisions since the collapse of the National Bank of Washington, the package also phases out the reimbursement of foreign deposits not covered by the FDIC at insolvent banks unless absorbed by a special insurance pool.

Focus on the Home Front

Instead of relying on foreign bank crackdowns, which invite rancor and retaliation from partners abroad, Congress and the administration should focus on internal overhaul as the core of an international competitiveness strategy.

While opening overseas markets and protecting the banking system from manipulation are important, they pale against the urgency of revamping domestic policies that undermine financial strength and security.

This year's elections offer the prospect of transforming last year's bungled reform campaign into a fresh cooperative drive for salutary change. Broader branching, securities, and insurance powers can serve as major steps toward regaining global banking prominence.

Perhaps such home-grown solutions will diminish the tendency to lash out against foreign competitors, and will create a firm foundation for Mr. Dinkins and his fellow mayors to corral the international investment that normally flows to world-class cities.

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