U.S. bank regulators on Tuesday approved a watered-down version of a proposal to jump-start the securitization market while boosting standards to avoid abuses that contributed to the economic crisis.

The board of the Federal Deposit Insurance Corp agreed to an interim proposed rule to give certain securitized assets more protection if the banks offering them abide by certain new restrictions.

The proposal is subject to a 45-day comment period and may change significantly from an original proposal backed Chairman Sheila Bair. That proposal contained restrictions on issuers of the securities that caused division on the board, and the proposal was watered down to reflect that.

After careful examination of (the original proposal) ... I was not comfortable moving forward with a specific notice of proposed rulemaking, said Comptroller of the Currency John Dugan, a board member.

He cited concerns of other agencies and interested parties in his worry that the requirements could have unintended consequences, such as increased costs for consumers.

Dugan criticized several components of an earlier version of the rule, including requirements that certain assets be kept on the balance sheets and other restrictions.

The proposal calls for banks to voluntarily retain an ownership interest in the loans they package into securities, known as keeping skin in the game.

Securitizations fueled the recent financial crisis because bad loans were packaged and then sliced and diced into securities that widely spread risk through the financial system.

The market for securitizations virtually froze during the crisis and has only recently begun to thaw, largely due to government support.

In a separate vote, the FDIC board agreed to give banks more time to build capital cushions against more than $1 trillion of assets that will be moved back on their balance sheets on January 1.

The FDIC unanimously agreed to phase in the capital implications that are associated with an accounting change that goes into effect next year and will move risky assets previously off balance sheet back on to it.

The vote on Tuesday gives banks at least two more quarters to comply with the new rules. Banks will need to be fully compliant by the middle of 2011.

(Reporting by Kim Dixon and Karey Wutkowski; Editing by Dan Grebler)

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