Small Banks Fearful that Fed Will Kill Off the Recovery

The expectation of another rate hike is turning community bankers into armchair economists, and their advice to the Federal Reserve Board is this: Slow down. TRENDLINE

Though the country's Main Street banks have by and large dealt handily with the rise in rates - many are benefiting greatly - the news last week from Alan Greenspan that the Federal Reserve Board will probably likely move to increase rates for the seventh time in a year was met with anxiety.

"If we have another half-a-point increase we'll do O.K.," said William Rowland, chief financial officer of First City Bank in Mufreesboro, Tenn. "The question becomes: How many more increase are we going to have. I have no doubt that when it gets into double digits, the consumers' appetite for borrowing will greatly diminish."

For Farmers and Mechanics Bank in Middletown, Conn., which loaded up with short-term, adjustable-rate securities early last year, the rate increases have been a boon. Still, chief financial officer Joel Hyman said that if he were a Federal Reserve governor, he would hold off raising rates.

"I don't think we've seen the full effect of the last three or four rate moves yet," he said. "From the viewpoint of someone in Connecticut, we were just getting out of a recession when the increase in rates stalled our recovery."

Ditto for California. There, many business-oriented community banks, hurt worst in that state's 1991 recession, are the biggest beneficiaries of rising rates.

"Our spread increased 125 basis points last year," said Carol H. Rowland, chief financial officer of Mid-Peninsula Bank in Palo Alto. "But frankly, we don't want any more increases. It really stops your oars, and we don't like to see that squeeze on our borrowers."

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