The Federal Reserve and the Treasury Department struck a deal yesterday that removed a long-standing regulatory obstacle to a bill that would lift Depression-era restrictions on banks. The compromise greatly increases the chances that the 20-year effort to revamp financial services laws will finally bear fruit this year.

Key lawmakers from the House and Senate worked late last night to build on the Treasury-Fed deal to craft a compromise version of legislation that passed the House and Senate in different forms earlier this year.

The legislation would make it much easier for banks, insurance companies and securities firms to merge and create one-stop companies offering everything from checking accounts to car insurance.

But disputes over privacy protections and lending to the poor--which the White House says must be settled to avoid a veto--were still unresolved when the lawmakers adjourned around 9:30 p.m., agreeing to reconvene today.

Fed and Treasury officials have battled over which agency should be the top regulator as banking melds with other financial services such as securities and insurance. Under the plan reached around 3:30 a.m. yesterday, neither agency would have full regulatory oversight. Instead, the Fed would continue to regulate financial holding companies that own banks, and the Treasury would continue to regulate nationally chartered banks.

But the Fed and Treasury would share oversight of new activities such as investing in commerical firms that the bill would allow banks to engage in, either through a subsidiary or an affiliate.

The White House had guaranteed a veto if the regulatory issue were not resolved.

Lawmakers also voted to include in the final version of the legislation a provision that would effectively stop holding companies that own a single thrift institution from being sold to non-banking companies, such as a clothing retailer or car manufacturer. The administration, as well as House Banking Committee Chairman Jim Leach (R-Iowa), wants to ban such sales, which are allowed under current law. If the legislation becomes law, the provision would, for example, prevent Wal-Mart Stores Inc. from buying a thrift, as it has applied to federal banking regulators to do.

And finally, Senate Banking Committee Chairman Phil Gramm (R-Tex.), a leader in the effort to draft a compromise bill, reached an agreement with the Securities and Exchange Commission over how consumers buying securities through bank trust departments would be protected from fraud.

If the agreement is voted into the final draft today, as it is expected to be, the SEC will support the bill, removing yet another roadblock to final passage.

But other key issues remained outstanding. One is the Community Reinvestment Act, which requires banks to lend in underserved areas. The White House objects to a provision backed by Gramm and other Republicans that would give smaller banks greater leeway in fulfilling their CRA obligations.

Many lawmakers and lobbyists believe that the White House will be very inflexible on CRA and would make good its veto threat on any legislation that failed to hold banks to at least the same standard as current law. House and Senate lawmakers voted along party lines to defeat a Democratic effort to rewrite the CRA provision opposed by the White House.

Lawmakers also voted to amend the final version of the bill to allow the creation of banks for the wealthy that don't carry federal deposit insurance, thus freeing them from many federal regulations. The creation of this new type of bank was favored by financial giants such as J.P. Morgan & Co. and Goldman Sachs Group Inc. Whether this new category of banks would be subject to CRA rules remains unclear.

Democrats and Republicans also remained at odds over privacy. Consumer groups favor letting individuals stop companies from sharing their financial data with affiliates or third parties, but financial firms say that would defeat the purpose of industry mergers.

Administration officials have been vague about the details of what they would accept in terms of privacy protections, leading many lobbyists and lawmakers yesterday to say the White House might be flexible on these issues.

If enacted, the law would reflect what has already been happening in the marketplace, where financial firms have used legal loopholes and changes in regulation to expand into each other's businesses. Citicorp and Travelers Insurance merged last year to create Citigroup, for instance, though without new legislation, the nation's largest financial services firm might be forced to shed its insurance operations.