With $110.8 billion in equity and long-term debt, Morgan Stanley is the world's largest securities firm, according to the Institutional Investor magazine's annual capital position rankings.

Morgan Stanley has now unseated Merrill Lynch, which had held the No. 1 spot since 1988. With a total capital of $102.6 billion, Merrill falls to third place, behind Goldman, Sachs & Co. ($105.8 billion in capital).

Morgan Stanley and Goldman Sachs boosted their capital levels by 34 per cent in 2004; Merrill Lynch increased its capital base by 7 per cent, after a 17 per cent increase in 2003.

Institutional Investor reported that competitive pressures are forcing securities firms to boost their capital.

Commercial banks continue to use their corporate lending relationships and huge balance sheets to wrest business from investment banks, forcing broker-dealers to extend loans to keep pace and turn to proprietary trading to make up for lost profits, the magazine said.