Most Big Banks Cut Prime Rate Half a Point : Finance: The decline to 9.5% isn’t expected to spur borrowing because of Mideast war fears and concern over the budget deficit.
Nearly all of the nation’s major banks slashed their prime rates Wednesday to 9.5% from 10%, but economists and bankers expect the moves to trigger little new borrowing as long as there is a threat of war in the Persian Gulf.
In addition, they said, big economic problems loom that will restrain borrowing even with credit cheaper.
Commercial real estate markets are badly overbuilt, so lower rates are unlikely to spark much borrowing for development of offices, shopping centers, hotels and housing tracts. Corporate and consumer debt remains uncomfortably high. And confidence in the economy remains low, caused by such factors as the Persian Gulf crisis and the nation’s huge budget deficit.
“If there isn’t confidence out there, nobody is going to want to lend or borrow no matter what the rate is,” said Irwin L. Kellner, chief economist with Manufacturers Hanover Corp. in New York.
The move by banks to drop their benchmark lending rates, the first in nearly a year for most banks, had been expected after the Federal Reserve Board last month loosened the screws on credit. On Wednesday, San Francisco-based Bank of America put into effect a 9.5% rate that was announced on Monday.
On Dec. 20, a similar move was made by First Chicago Corp.’s First National Bank of Chicago. The 9.5% prime is the lowest rate since July, 1988.
Wednesday’s moves were led by major “money center” banks in New York.
Citibank and Morgan Guaranty led the way, followed later in the day by Chase Manhattan, Bankers Trust and Chemical Bank. Major regional banks such as NCNB in North Carolina also followed.
In California, Security Pacific National Bank waited until late in the day to drop its rate.
Two major California banks, First Interstate Bank of California and Wells Fargo Bank, by late Wednesday had still not dropped their rates, although analysts and bankers expect both banks to follow suit soon. Neither bank explained why.
The prime rate is the rate bank’s charge their best customers, although its importance has dwindled in recent years as corporations bypassed banks and borrowed more by issuing IOUs in the form of commercial paper.
Although lower prime rates won’t trigger much new corporate borrowing, there are some immediate benefits.
Many small to medium-size businesses, for example, will pay less money to their banks because their loans are tied to prime rates.
Consumers are affected less. Banks sometimes will tie rates on home equity loans to the prime rate, and a small number of upscale credit cards are pegged to the prime. But those practices vary widely.
Banks had been holding off lowering their prime rates until after the first of the year for several reasons.
Activity around the holidays is low anyway, so there was little pressure to react immediately to the Fed’s moves.
Demand is low now for loans as companies restrain spending plans, so banks are under less pressure to react quickly to the competition.
Postponing a drop in the prime also allowed banks, whose profits are under pressure, to squeeze a few more dollars out of loans that are tied to the prime rate.
Bank customers in some cases have loans that are set on the first day of the month or quarter, so waiting until after the first of the year allowed banks to charge the older, higher rates.
Finally, banks at the end of the year were trying to avoid expanding their loans because it would hurt their year-end capital ratios, a measurement of the size of an institutions’s financial cushion.
Some economists predict that the prime rate could drop to 8.5% by mid year.
First Interstate Chief Economist Jerry Jordan said resolving the Persian Gulf crisis one way or another will help bring the rate down sooner.
He added that one big uncertainty looming is how much spending is being delayed by businesses and consumers as a direct result of the Persian Gulf uncertainty.
Although most economists downplayed the impact of the lastest prime rate cuts, some saw it as a good sign. James E. Annable, chief economist at First Chicago, said the money saved by businesses and consumers with loans tied the prime will be spent, which helps the economy. He added that lower rates are critical to ending the nation’s economic slide.
“If you can’t get interest rates down, you can’t sow the seeds for a recovery,” he said.
