Banks Cut Their Passbook Savings Rates Below 3% : Lending: The action pushes rates to lowest level in 30 years and may persuade account holders to shift money to stocks and bonds.

Bad news for those with money in the bank: Passbook savings rates have dropped below 3% for the first time in 30 years, their free fall accelerated by the Federal Reserve’s recent cut in the discount rate.

That’s putting pressure on savers, who are finding it tough to earn a satisfactory return on their money--especially if they remember getting 17% on money-market deposits in the late 1970s. Some say the low rates are forcing depositors out of bank branches and into the arms of stock and bond brokers.

Three percent is a kind of low-water mark. Not since 1962 have passbook rates been lower, said Hugo Ottolenghi, editor of Bank Rate Monitor in West Palm Beach, Fla.

The rate cutting appears most dramatic in California, where loan demand is slack and banks are still reeling from the lingering economic downturn. In just the last week, Bank of America cut its rate on passbook accounts to 2.75% from 3.25% a week earlier. Passbook rates at Wells Fargo and First Interstate fell to 2.75% from 3%.

But banks in other states are also paring rates. New York-based Citibank, for example, has held its passbook rate steady at 3%, but it cut the rate on six-month certificates of deposit to 2.76% from 3.05%. Rates on five-year CDs fell to 5.83% from 6.02% last week.

Meanwhile, First National Bank of Chicago says rates on six-month certificates of deposit will drop today to 3.05% from 3.35%. CDs with three- to five-year maturities will pay 4.9%, down from 5.2%. But passbook rates will remain constant at 3.25% for small deposits and 3.5% for deposits over $2,500. Rates on money-market accounts are only slightly higher.

This most recent round of rate slashing comes in response to the Federal Reserve’s move last Thursday to cut bankers’ borrowing rates to 3%. That spurred major banks to cut lending rates on everything from commercial loans to mortgages.

Bankers said they had no choice but to cut deposit rates as well. Banks make a profit by borrowing from depositors at one rate and lending the money out at a higher rate. The difference between what banks charge for loans and what they pay for deposits is called a “margin” or “spread.”

Despite the rate cuts, banks say margins are getting squeezed because loan rates are generally coming down faster than deposit rates.

“Banks are reluctant to cut rates” because they know they will lose business to brokerages and mutual funds, said Janet W. Lamkin, vice president of the California Banker’s Assn. in San Francisco. “But they don’t really have a choice. Profits are slim now, and this is going to further dampen profitability.”

However, bankers acknowledge that they are not aggressively competing for deposits because loan demand is slack and they have little need for the money.

“One of the key problems in the banking world today is there is not any loan demand,” said Kenneth T. Mayland, senior vice president and chief economist of Society National Bank in Cleveland. “If loans--our basic stock in trade--are not growing, we are not going to be aggressive in trying to maintain the level of deposits.”

The worst sufferers seem to be depositors who live on the interest from their savings accounts. Where it was fairly simple to get 7.5% on a five-year CD last year, depositors are now lucky to get 6%. That difference equates to $1,500 on a $100,000 CD--a substantial cut in income.

“Fixed-income investors are getting gored,’ said Norm Van Hall, a La Habra resident who once invested the bulk of his assets in bank and thrift CDs. “I can no longer just mindlessly leave my money at a savings and loan today because rates are low and there’s no competition.”

Still, some economists believe that the tide will soon turn.

“The system is just now reaching the peak of liquidity. We are flush with deposits at very low costs,” said David L. Littmann, chief economist at Comerica Inc. in Detroit. “But sometime this year we will probably see the economy recovering and loan demand starting to rise. And at that point, banks will start to boost their rates.”

Declining Rates

Interest rates on deposits have fallen sharply at many large financial institutions in response to cuts in lending rates. Here’s a sampling of rate changes at banks in California and nationwide.

Passbook rate 6-month CD 12-month CD Bank now/last week now/last week now/last week Bank of America 2.75 / 3.25 3.10 / 3.30 3.44 / 3.63 Wells Fargo 2.75 / 3.00 3.00 / 3.29 3.34 / 3.63 First Interstate 2.75 / 3.00 3.05*/ 3.25 3.45*/ 3.65 Citibank 3.00 / 3.00 2.76 / 3.05 3.05 / 3.44 First National 3.25 / 3.25 3.05 / 3.35 3.15 / 3.45 Bank of Chicago

5-year CD Bank now/last week Bank of America 5.82 / 6.20 Wells Fargo 5.83 / 6.20 First Interstate 5.35*/ 5.50 Citibank 5.83 / 6.02 First National 4.90 / 5.2** Bank of Chicago

* First Interstate has not yet changed its CD rates, but expects to change them this week to the levels shown.

** The rate is for CDs with maturities ranging between three and five years. The bank does not offer a simple five-year CD.