Fed Lets Banks Swap Loans for Foreign Firms

The Federal Reserve Board announced Wednesday that it is granting new authority for American banks to trade loans made in developing countries for direct ownership of property in those countries.

The Fed’s action was seen as providing a boost to the Reagan Administration’s efforts to promote new approaches to solving the Third World debt crisis.

The Fed said its new rule, which goes into effect immediately, allows banks, through their subsidiaries, to own up to 100%of foreign financial and non-financial companies.

The previous rule restricted an American bank’s holdings to 20%of the shares of non-financial companies. The Fed regulations always allowed up to 100% ownership of financial firms.

The 100%ownership will apply only if a non-financial enterprise is acquired directly from a foreign government with a high level of foreign debt. The rule also limits a bank’s ownership of the foreign enterprise to five years--unless the Fed grants an extension.

Vote Unanimous

The Fed said it was imposing the time limit because it does not want to create a situation whereby banks move permanently into non-banking enterprises. Rather, officials said, they wanted to encourage flexibility by the banks in handling their debt portfolios.

Treasury Secretary James A. Baker III has been trying to get debtor nations and American banks to come up with new strategies to help solve the debt crisis, which has shown little improvement in the past two years.

This year, many of the nation’s biggest banks have announced that they were adding large amounts of money to their loss reserves against Third World loans. The action began with an announcement by Citicorp on May 19 that it was setting aside $3 billion against possible losses on its loans to Brazil.

John Reed, chairman of Citicorp, said at the time that a more flexible strategy was needed to solve the debt problem.