Big Banks Cut Prime to 8.5%; Industry Likely To Follow Suit

The nation's largest banks moved quickly on Wednesday to lower their prime lending rates by a quarter of a point, possibly giving a lift to loan demand.

Responding to the Federal Reserve's decision to cut the federal funds rate to 5.5% from 5.75%, Banc One Corp., Citicorp, Chase Manhattan Corp., BankAmerica Corp., and other major banks lowered their prime interest rates to 8.5%. The rest of the industry is expected to follow suit.

"It's just a matter of day or two before it becomes universal," said Eugene J. Sherman, senior vice president with M.A. Schapiro & Co., New York.

Analysts said the lower rates could give at least a psychological lift to consumer borrowing and improve the industry's outlook.

"It's really a good move all the way around," said Jeff K. Thredgold, chief business economist with Cleveland-based KeyCorp. "I think banks tend to do better in a declining rate environment."

The drop in interest rates is most likely to affect home-equity loans and smaller commercial loans, because rates on those credits are often tied to the prime rate. Rates on credit cards are also likely to be eased, though not as immediately.

"The prime rate has increasingly become a consumer loan rate," said Lynn Reaser, chief economist at First Interstate Bancorp, Los Angeles. "So home equity loans and other types of consumer loans tied to the prime will see lower rates."

"The benefit there is that consumers will pay about a quarter-point less," said Nicholas Perna, chief economist at Fleet Financial Group Inc. "A quarter-point isn't a lot. But it is a move in the right direction. It might make it easier for them to pay loans back."

Some observers said the Fed action and the prime cuts - the second round of rate reductions this year - could portend generally lower rates in 1996.

Mr. Thredgold predicted that, if the economic data in the next month prove to be weak, the Fed might lower interest rates another 50 basis points by March.

Analysts said the rate cuts also would help unsteady markets, which tumbled on Monday when investors thought the federal budget crisis would prevent the Fed from acting.

Bank stocks staged a mild rally on Tuesday after the Fed action and changed little on Wednesday.

Still, analysts warned that some large banks would be hurt by the drop in interest rates.

"The average regional bank in the United States is negatively affected by this," said Richard X. Bove, a bank-stock analyst with Raymond James & Associates, Tampa. "Just as General Motors wants to sell Chevys at higher prices, banks want to sell loans at higher prices. The economics are exactly the same."

Robert G. Dederick, an economic consultant at Northern Trust Co., Chicago, said the quarter-point drop in the prime wouldn't by itself do much for the economy or loan demand. But he said he expects additional rate cuts, and those interest drops will help loan demand.

"Twenty-five basis points doesn't do much," he said. "But 25 plus 25 plus 25 does, and I do see a succession of cuts ahead."

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