Fed Gives Bank Limited Right to Deal in Stocks : Finance: The decision is seen as a clear sign that banks, securities firms may soon compete head-to-head.

The Federal Reserve Board gave a unit of the New York banking firm J. P. Morgan & Co. permission Thursday to underwrite and deal in stocks on a limited basis, the biggest crack yet in the Depression-era wall separating commercial and investment banking.

The decision is a clear sign that banks and securities firms may soon be regularly competing head-to-head.

“What we are seeing is that the lines between the securities business and the banking business are getting more blurred,” said Donald K. Crowley, a bank analyst with Keefe, Bruyette & Woods in San Francisco.

The barrier, called the Glass-Steagall Act, has become like the financial industry’s Berlin Wall, separating Wall Street from banking but under enormous pressure in recent years to come down.

Banks have complained for years that they are losing ground to other financial firms such as brokerages and foreign competitors, in part because of Glass-Steagall and other laws that limit their powers and the products they can offer. Banks have increasingly lost corporate customers, who have found it cheaper to issue corporate IOUs through securities firms.

The Fed had indicated that it might approve the underwriting of stock by banks in January, 1989, when it gave J. P. Morgan and three other banking firms permission to underwrite corporate debt through subsidiaries that are separate from their banks. Stock underwriting involves buying securities for resale to investors.

But the Fed has held off on Morgan’s request pending a review to make sure that assets of its commercial banking operation, Morgan Guaranty Trust Co. of New York, would be protected from losses in any securities operations. In a letter to its J. P. Morgan Securities subsidiary, the Fed said it “relied upon Morgan’s statement that it recognizes its commitment to maintain capital . . . at levels necessary to support its activities.”

The Securities Industry Assn., which has led the opposition to giving banks more powers, said in a statement that the Fed decision “is astonishing.” The association, which in the past year has eased its opposition to expanding bank powers, questioned whether proper safeguards were in place.

Named for Rep. Henry B. Steagall of Alabama and Sen. Carter Glass of Virginia, the Glass-Steagall Act since 1933 has prohibited banks with federally insured deposits from underwriting most securities. The act was passed by Congress during the depths of the Great Depression amid worries that losses in the stock market would sink banks.

Although the Fed action is a landmark ruling, its impact is not expected to be felt by Wall Street for some time. Only a few major banks have the financial wherewithal to enter the business, and the Fed is expected to approve applications from only the strongest. In addition, Wall Street is going through a recession, so there is little activity now anyway.

Bank activities will be limited initially. Although it has eased the regulations, the Fed still caps the amount of revenue a bank subsidiary can receive from underwriting at 10%. The Fed may raise that soon to 40%.

Morgan in the early part of the century was both a powerful bank and brokerage firm. Founded in the early part of the century, Morgan has been at the forefront of pushing for expanded powers. Morgan, expecting the move, has its stock subsidiary ready to operate.

Three other U.S. banks--Citicorp, Bankers Trust of New York and Chase Manhattan--are waiting for word on their applications. Two Canadian banks, Royal Bank of Canada and Canadian Imperial Bank of Commerce, also have applications pending.

Of the major California banks, the most likely to take advantage of expanded powers being given by the Fed is Security Pacific Corp. in Los Angeles, which has previously expanded into the securities business overseas, although with mixed success.

Since 1987, the Fed has chipped away at Glass-Steagall, first allowing banks permission to underwrite on a limited basis corporate IOUs, municipal bonds and securities backed by mortgage payments.

Fed Chairman Alan Greenspan has made it known he favors giving banks expanded powers. The securities industry has even eased its longstanding opposition over the past year.

Congress is expected to consider enhancing bank powers next year when the Bush Administration unveils plans to further deregulate financial services. Some believe, however, that the nation’s savings and loan debacle, expected to cost taxpayers $500 billion over the next 30 years, will lend strong support to arguments against giving banks expanded powers.

Some members of Congress have been irritated by the Fed’s actions on Glass-Steagall over the years because they believe they should be the ones to consider whether to repeal it or not.

Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee, and other congressional leaders complain that the Fed is unilaterally deregulating banking and have called on the agency to wait for congressional action.