WASHINGTON - Bolstering banks' ability to develop innovative products, a federal judge here ruled that banks can link the interest rate on certificates of deposit to the performance of a stock index.

The ruling upholds the Comptroller's 1988 decision allowing Chase Manhattan Bank to offer a CD tied to the performance of the Standards & Poor's 500 composite index.

It was the first case to take advantage of the NationsBank v. Valic case, in which the Supreme Court concluded that the Comptroller of the currency has broad authority to decide what powers can be exercised by national banks.

(Separately, Chase vowed to become one the top 10 mutual fund companies in 10 years. See story on page 14).

U.S. District Court Judge Thomas Penfield Jackson, in a decision the parties received Thursday, said the Supreme Court firmly established in the Valic case that judges must defer to the Comptroller when deciding what powers banks possess.

"That principle applies here," the judge wrote in dismissing Investment Company Institute v. Ludwig, which the parties argued nearly six years ago.

Judge Jackson, in a three-page decision that was filed Jan. 23, did not address the mutual fund trade group's argument that the linked CDs violate several provisions of the Glass-Steagall Act.

Banks that offer CDs linked to stock funds can rest easier now that the judge has ruled, said Michael Crotty, deputy general counsel to the American Bankers Association.

"It removes a legal cloud," Mr. Crotty said. "They shouldn't worry anymore about being sued for offering this service to their customers."

L. Robert Griffin, the director of litigation at the Office of the Comptroller of the Currency, said the industry expected to win.

"The stuff is already going on," Mr. Griffin said. "It is so clearly correct that no one has even pressed for a decision during all these years."

Mr. Griffin said the decision should apply to CDs linked to other indexes, such as the Dow Jones industrials average.

"I don't see why not," Mr. Griffin said. "We already have them linked to sporting events."

Institute spokesman Erick Kanter said he doubts his groups will appeal.

"I don't think we are going to pursue this any further," Mr. Kanter said. "It was started in a different era, in terms of our position on these matters."

Robert B. Adams, deputy general counsel at Chase, said he is elated about the decision because it gives banks the right to sell indexed accounts and clearly establishes the Comptroller's authority to interpret the Glass-Steagall Act.

"It means every time we come out with a new product, we won't have to go to court to determine its legality," Mr. Adams said. "It is very significant.

The case is the last of a series of challenges to bank securities powers that plagued the industry throughout the late 1980s. Another line of those cases challenged whether banks could broker mutual funds.

In one indication of how much the environment has changed since the ICI first filed suit, Chase became a member of the mutual fund group in 1992.

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