Major Banks Slow to Cut Interest Rates

The nation’s major banks are taking their time before mimicking the Federal Reserve’s latest interest rate-cutting maneuver, partly because of pressure to bolster bank profits, experts said Thursday.

A recent decline in short-term interest rates--which banks use as a cue for their own benchmark, or prime, lending rates--raised expectations that major banks soon would cut the prime from the 10.5% level that has held since midsummer.

But analysts said that after setting aside billions of dollars during the last quarter to cover potential losses from bad Third World loans, major banks are under extreme pressure to shore up their earnings.

As their own costs of borrowing decline, banks make more money the longer they keep from reducing the prime rate--especially because more and more consumer loans are pegged to the prime.

Furthermore, banks probably were waiting for further clues to the direction of the economy, especially inflationary indicators that could cause the Fed to bump rates higher.

Short-term rates have been trending lower under pressure from the Fed, which economists say is attempting to prevent a recession. The Fed’s action is reflected in the federal funds rate--the rate on overnight loans between banks--which was trading at 8.438% late Thursday, down from 8.75% a week earlier and 8.875% a month earlier.

As a result, the spread between the banks’ borrowing costs and their benchmark lending fee has widened to nearly 2 percentage points.

Over the past year, however, that spread has averaged 1.5 percentage points. “So you have a situation where the banks are clearly dragging their feet,” said Ward McCarthy, managing director at Princeton, N.J.-based Stone & McCarthy Associates.

In the past, banks generally were quick to reduce lending rates for competitive reasons: The businesses they lent to could simply pack up and seek other sources of short-term financing, such as brokerage houses.

But “consumers don’t have a lot of options,” said Robert Brusca, chief economist at Nikko Securities Co. International, referring to an increasing tendency to price consumer loans based on the prime rate.