Bank of Chicago Drops Its Prime Rate to 9.5% After Action by Fed

One of the nation’s largest banks cut its prime lending rate by a steep 0.5 percentage point to 9.5% today, two days after the Federal Reserve lowered one of its key lending rates in an effort to prevent the recession from deepening.

First National Bank of Chicago, the 13th-largest U.S. banking company, said it lowered its prime rate from 10% effective immediately.

Earlier in the month, a handful of regional banks took a more cautious step by easing their prime rates to 9.75%, but analysts said larger institutions were waiting for a cue from the Fed before following suit.

The recent decline in the prime rate, which serves as a guide for bank lending charges for a host of business and consumer loans, marks the first cut in the rate in nearly a year.

“It is a long-overdue adjustment,” said William Sullivan, director of money market research at Dean Witter Reynolds Inc. “The fact that this is the first major national money center bank to go might trigger others to follow soon.”

Sullivan noted that the 0.5 percentage point cut was a bit steeper than had been expected, but he said it indicated that banks “are finally taking the message that the Fed wants rates lower.”

On Tuesday the Fed cut the discount rate--the interest it charges on loans to member banks--to 6.5% from 7%, the first decline in the rate since August, 1986. But in addition, the Fed has also been gradually cutting the federal funds rate--the rate banks charge each other on overnight loans.

The Fed funds rate has been eased twice this month alone. It was trimmed a quarter of a percentage point on Dec. 7 and since has fallen to 7%.

Today’s prime rate cut “is clearly in response to the Fed’s recent actions, which included not only a drop in the funds rate but a downward adjustment in the discount rate,” Sullivan said.

James Annable, First Chicago’s chief economist, said that by easing the Fed funds rate, the nation’s central bank “is telling the market that we are taking this recession seriously.” And once that rate moved lower, it was time to “pass it on to our customers.”

Annable said consumers should see declines next month on loans that are tied to the prime rate, such as home equity lines of credit.