The decision to off-load the division - a move initially rejected by Morgan Stanley in 2005 - will see Discover become publicly traded, following the listing of MasterCard International in May, and the announcement of similar plans from Visa and American Express.
Morgan Stanley's chief executive John Mack said the decision to split the bank's securities business from its cards and payment business would be the best solution for continued growth and for shareholders.
"We have concluded, after our most recent strategic review, that [the two businesses] can best execute their growth strategies as two stand-alone, well-capitalized companies with independent boards of directors focused on creating shareholder value," he said.
"The spin-off will allow Discover to continue building on its strong brand and significant scale. We also believe the spin-off will unlock considerable value for the shareholders of Morgan Stanley."
The bank also reported better-than-expected results for the fiscal fourth quarter of the year, although net income fell to $2.21 billion from $2.47 billion a year ago.