Major Chicago Bank Trims Its Prime Rate to 9.5% : Economy: First Chicago has the field to itself. Other big institutions held back, at least for now, in going to a single-digit benchmark rate.

First National Bank of Chicago on Thursday became the first of the nation’s largest banks to drop its prime rate below 10% since the Federal Reserve’s loosening of the nation’s credit this week. But other major banks balked in immediately following First Chicago, which slashed its prime half a percentage point to 9.5%.

Bankers and economists attributed other banks’ reluctance in part to a desire by the profit-squeezed institutions to avoid giving up a few extra dollars in interest payments from loans that are pegged to their prime rates.

Also, banks are reluctant to expand lending so close to year-end because it will lower their capital ratios, which show the size of their financial cushions against losses. Banks want to show as high a ratio as possible for their year-end financial reports.

Still, most banks are expected to follow the lead of the nation’s 12th-largest bank and yield shortly to the pressure to cut rates.

“It will be any day now. As far as I’m concerned, it could happen immediately,” said Irwin L. Kellner, chief economist with Manu- facturers Hanover Corp. in New York.

The prime rate is significant because banks peg a variety of variable-rate loans to it, including credits to small- and medium-sized businesses and home equity loans to consumers. Technically, the prime is the rate banks charge their best corporate customers, but its significance in that regard has lessened in recent years as corporations increasingly rely on corporate IOUs and other nonbank financing techniques.

One California banker, who asked not be identified, suggested that many large banks will wait until as close to Jan. 1 as possible before lowering their prime rates, to avoid hurting their capital ratios. He said that if a bank lowers its prime rate now, some corporate customers with existing lines of credit will tap the bank for funds. That would cause a surge in the bank’s loans, which in turn lowers the ratio of its capital to its loans and other assets.

The year-end ratio is important because it is published in the bank’s annual report and is frequently used by investors, depositors and others as a guide to the institution’s strength. With growing doubts about the industry, banks are especially eager to keep that year-end level high.

Even if rates are eventually lowered, a key question remains: Will banks expand lending significantly? With the industry ailing, the answer isn’t as clear as it would have been in past years.

For one thing, commercial real estate markets are glutted, so banks aren’t about to start making loans on new projects. Corporations are cutting back as the economy softens and have fewer lending needs.

In addition, bankers--under pressure to bolster their capital ratios--are shrinking operations rather than expanding. Many are reluctant to make a lot of new loans anyway because regulators are cracking down on bank lending practices. And consumer borrowing is slowing in areas where unemployment rates are rising.

“I’m not going to say it’s going to cause a big surge in lending because I don’t think it will,” economist Kellner said. “The banks are very cautious in putting on new loans in light of their efforts to improve capital ratios and ongoing criticism by regulators.”

Economists said, however, that lower rates could create significant refinancing opportunities for banks as debt-laden corporations seek to ease their debt payments and homeowners seek more favorable mortgage payments.

First National Bank of Chicago, the main subsidiary of First Chicago Corp., lately has been a leader among banks in lowering the prime. Its action Thursday could lead to the first major break in the rate since January. The 9.5% rate is the lowest since July, 1988.

First Chicago’s move eclipsed more cautious actions earlier in the week by some regional banks, which lowered their rates to 9.75%. Most of those banks are small, although the list did include one major regional bank, Norwest in Minneapolis.

The drops come in the wake of Fed actions to force down the federal funds rate, which is what banks charge each other for overnight loans. The Fed also slashed the discount rate--which the Fed charges banks for short-term loans--to 6.5% from 7%.

The discount rate is a highly visible, largely symbolic barometer because few banks actually borrow from the Fed. James E. Annable, First Chicago’s chief economist, said the Fed move to force the federal funds rate down to about 7% was the trigger for First Chicago’s move because it eased the bank’s cost of money.

THE FALLING PRIME A bank’s primary rate is the benchmark on which many other interest rates are based. Banks that have cut their prime rate in the past three weeks

BANK OLD RATE NEW RATE DATE OF CHANGE American 10% 9.5% 12/20 National Bank & Trust* First National 10% 9.5% 12/20 Bank of Chicago* Norwest Bank 10% 9.75% 12/20 of Minneapolis First Fidelity 10% 9.75% 12/18 Bancorp, Lawrenceville, N.J. Manufacturers 10% 9.75% 12/7 & Traders Trust of Buffalo, N.Y. Southwest 10% 9.75% 12/7 Bank of St. Louis

* Units of First Chicago Corp.