Like homeowners rushing to refinance mortgages at lower interest rates, several leading banks have taken steps to reduce their interest burden.

Since July, Chase Manhattan Corp., Chemical Banking Corp., Continental Bank Corp., and Fleet/Nostar Financial Group Inc. have elected to retire $755 million of senior notes as redemption dates arrived. In some cases, the banks have trimmed balance sheets; in others, they have refinanced with less costly debt.

Capital markets specialists said the trend is likely to continue as long as interest rates stay low and banks' funding needs remain limited.

KeyCorp, Marshall & Ilsley Corp., and NCNB Corp. are among banking companies with debt that becomes callable in 1992.

An Easy Decision

"If I could call high-coupon debt and replace it with low-coupon debt right now, it would take about two seconds for me to make that decision," a money-center banker said.

The calls have come as interest rates plummeted. Tuesday, the yield on the benchmark 30-year Treasury bond was 7.82%, about 120 basis points lower than the yield a year ago.

Fleet has called $310 million since the beginning of July, according to Richard Pannone, treasurer. Interest rates on the notes Fleet called ranged from 8.9% to 13.375%. Interest payments on the 13.375% debt alone would have been roughly $8 million per year until the notes matured in 2014.

Cheaper Replacement Debt

Fleet has replaced the debt with medium-term notes issued at more attractive rates, Mr. Pannone said.

Continental redeemed some of its senior notes as a way to lengthen maturities, said Brian Nocco, a funding executive. The Chicago company issued five-year senior notes in July with a coupon of 9.875% and used the proceeds to redeem an issue of 9.8% senior notes maturing in 1993.

"For a similar coupon, we extended the maturity remaining from two years to five years," Mr. Nocco said. In fact, Continental's all-in cost on the new issue was lower. In both instances, Continental entered into swap contracts to convert interest payments to floating rates from fixed rates. The cost of swap contracts is lower now than when the old notes were issued.

These actions do not affect capital ratios because regulators do not use senior debt to compute capital ratios.

That some banks are using cash to retire debt, instead of making new loans, is a further sign of anemic loan demand by creditworthy borrowers.

Only two banks issued new long-term debt in public markets last month though rates were low, according to bank analyst William Downes of Keefe, Bruvette & Woods Inc. "Banks are not putting on assets," he said. "Maybe they just don't need the liquidity."

Chase Manhattan called $23 million in senior notes during September. A spokesman said the company has no immediate plan to replace the funding -- which is a tiny portion of its intermediate and long-term debt, which totaled $6.9 billion at June 30.

Similarly, a spokeswoman for Chemical said her banks has not decided yet whether to replace the $100 million in senior notes it redeemed.

But not all banks are calling senior note issues when the opportunity arises. Several callable issues of Citicorp's debt are still outstanding. Mr. Downes pointed out, though, that the Citicorp issues do not have excessively high coupons -- so that calling them would not generate meaningful savings.

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