U.S. bank regulators on Tuesday approved an initial proposal to jump-start the securitization market and strengthen standards to avoid abuses that helped lead to the economic crisis, but the board remained divided on what limits to impose on banks.

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 from an original plan backed by Chairman Sheila Bair that contained restrictions on issuers of the securities and divided the board.

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 by other agencies and interested parties that the requirements could have unintentionally increased costs for consumers and led to a pullback in lending by banks.

Dugan criticized several components of the proposal, including requirements that certain assets be kept on balance sheets for a certain time and that it would only apply to insured banks and not to foreign institutions.

One concession proposed by Bair is for banks to voluntarily retain an ownership interest in the loans they package into securities -- or keeping skin in the game.

The exotic securitizations fueled the recent financial crisis as bad loans were packaged, then chopped into smaller securities that spread risk through the financial system.

While the securitization -- or the rebundling of loans and other assets into complex securities meant for trading -- did not cause the financial crisis, it did play a major role, Bair said.

Securitization certainly encouraged a focus by non-banks and later some insured banks and thrifts on deal production and fee generation at the expense of consumer protection and sound underwriting, she said.

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

The rules would be voluntary, but banks could be enticed to follow them because safe harbor protection and higher standards could mean better credit ratings and prices for the securitizations.

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 will move risky assets previously off balance sheet back on the books next year.

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.

That move was strongly backed by banks and other financial institutions.

(Reporting by Kim Dixon and Karey Wutkowski; editing by Jeffrey Benkoe)