Limit on Bank Investments Not Expected to Fall : Law: A proposal to repeal Glass-Steagall gets a mixed reaction. Few banks in California are moving to take advantage of broader powers.

Banking’s Berlin Wall is still a long way from coming down, even though it is showing new cracks.

The barrier is the federal Glass-Steagall Act, which since 1933 has established a legal barrier prohibiting commercial banks from entering investment banking activities, such as underwriting stocks. The law, passed during the Great Depression amid fears that securities operations could cause banks to collapse, has long been criticized by banks as outdated.

Despite advances made the past two years by banks taking advantage of softening regulations and an apparent weakening this month in opposition by the securities industry’s trade group, few believe that the barrier will fall soon. What’s more, it also is uncertain how interested banks are in getting into the securities business while it is so soft.

Major New York money center banks, such as Bankers Trust, J. P. Morgan, Chase Manhattan, Citicorp and Manufacturers Hanover, are leading the way and have been moving into areas allowed by banking regulators.

On the West Coast, Security Pacific Corp. in Los Angeles has clearly been the most active, and its desire to expand into investment banking is clear, as evidenced by stakes that it owns in securities firms in London, Australia and Canada.

Beyond that, few West Coast banks have made serious moves toward investment banking, mainly because federal regulations make it hard for all but the nation’s largest banks to get involved.

The most recent breakthrough came earlier this month when the Securities Industry Assn., the brokerage-industry trade group that has fought bank entry into the business in the past, adopted a position that would repeal Glass-Steagall in exchange for various privileges for brokerages, such as direct access to the Federal Reserve funds in a crisis.

Bankers have criticized the proposal because, they say, it provides murky rights for banks and may include too many restrictions on their activities, such as curbs on making loans to companies that receive underwriting services from a bank’s securities operation.

Reaction was mixed as well among banks on the significance of the announcement. Some said it was significant if only because the association moved on the issue. Yet others disagree, saying that the proposal contains too many strings.

“The proposal is nothing terribly novel,” said Security Pacific Corp. Vice Chairman David R. Lovejoy. He argues that the proposal contains more restrictions than are already in place.

Banking companies have been allowed some securities-related activity under Glass-Steagall, such as operating discount brokerages and underwriting government securities.

During the past two years, regulators have chipped away at the law by allowing banks such expanded powers as underwriting commercial paper (which is a short-term IOU), securities backed by mortgages and, most recently, corporate debt. Next year, regulators are expected to grant the power to underwrite stocks.

There is a big catch. The operations must be set up in a subsidiary, and the newer powers granted in the past two years may make up only 10% of the unit’s business. The rest must be in business long allowed under Glass-Steagall, such as underwriting U.S. government securities and general-obligation municipal bonds. In addition, there are barriers designed to put distance between a bank’s securities and banking operations.

Jerry Loeser, senior vice president in the legal department for First Interstate Bancorp in Los Angeles, notes that the 10% restriction means that banks must do a huge business in the areas where they traditionally have been permitted to operate in order to generate any meaningful business. As a result, he said, the huge money center banks in New York, which are already active in such areas as government securities and municipal bonds, have been the primary ones to take advantage of the chipping away at the law.

He said First Interstate has been inactive for several reasons, including the 10% restriction and a change in its strategic direction, which has seen it restructure and emphasize such areas as consumer banking.

Elsewhere in California, BankAmerica in San Francisco also has been less active as it has gone through its recent turnaround and pushed harder into consumer banking. Wells Fargo has been relatively inactive, emphasizing consumer banking as well as real estate lending and financing leveraged buyouts, in which companies are purchased with large amounts of debt that is paid off with funds generated from operations or asset sales.

Although relatively inactive for now, Union Bank, which is controlled by the Bank of Tokyo, ultimately is interested in investment banking, a bank spokesman said.

Lovejoy said one area that could be lucrative for banks if the restrictions fall is mortgage-backed securities. He notes that banks could underwrite securities backed by the billions of dollars in mortgages that they generate themselves.

Samuel J. Baptista, president of the Financial Services Council, a group of banks, brokerages and financial services firms that favors breaking down financial industry barriers, said it will take lengthy negotiations among banks, brokerages and insurance companies to reach agreements so that they enter each other’s businesses.