Major banks lower prime administration acknowledges recession MNC is among those cutting rate to 9.5%

January 03, 1991|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun Karen Hosler of The Sun's Washington Bureau and Peter H. Frank of The Sun's business staff contributed to this article.

WASHINGTON -- Cuts in the prime lending rate spread yesterday as several of the country's largest banks reduced their rate a half percentage point, to 9.5 percent.

At the same time, the White House acknowledged that the economy has fallen into a recession, although President Bush hesitated to use the term to describe the economy nationwide.

Mr. Bush said Tuesday in an interview with David Frost that "in some areas, we're clearly in a recession, and this concerns me because people are hurting."

But Michael Boskin, the president's chief economic adviser, was more forthright in an interview yesterday on NBC's "Today" show, saying that the "economy has probably entered a recession."

The president's chief spokesman, Marlin Fitzwater, said the nation had entered a "recessionary kind of period."

All of the officials said they think the recession will be mild and will end by midyear.

Among the big banks, yesterday's cuts in the prime rate were made by Citibank, the nation's largest bank; Chase Manhattan Bank, the second-largest; and Morgan Guaranty Trust Co., the fourth-largest.

NCNB Corp. of Charlotte, N.C., and Mellon Bank of Pittsburgh also lowered their rates.

Locally, a number of the largest regional banking companies followed the lead of their money-center brethren.

MNC Financial Inc., Maryland's largest banking company, said yesterday afternoon that it also had lowered its prime rate by half a point, to 9.5 percent. The company said the move was effective immediately at its two banking subsidiaries, Maryland National Bank and American Security Bank.

C&S/Sovran Corp., parent of Sovran Bank/Maryland and one of the largest regional banking companies on the East Coast, said late yesterday its prime also would drop to 9.5 percent today.

Nena Teller, a spokeswoman at Richmond, Va.-based Signet Banking Corp., owner of Signet Bank/Maryland, said her company expected to lower its prime to 9.5 percent today but that it was unclear late yesterday whether the cut would be effective at all of its subsidiaries.

Maryland's second-largest banking company, First Maryland Bancorp, parent of First National Bank of Maryland, said it was studying the move and probably would decide today whether to lower its prime.

The announcements followed a similar cut Monday by San Francis co-based Bank of America, the nation's third-largest bank. Other banks are expected to reduce their rates in response to the weak economy and their lower cost of funds.

The prime rate is traditionally charged to a bank's best corporate customers and serves as a benchmark for calculating rates on loans to businesses and for determining many fixed- and adjustable-rate consumer loans.

Reductions in those rates could eventually stimulate purchases, ranging from cars to homes, but the immediate impact might be slight, with the economy in a recession and consumer demand weak.

The prime last changed Jan. 8, 1990, when it went to 10 percent from 10.5 percent.

But since then, banks have declined to move their most visible lending rate, even though the Federal Reserve has repeatedly lowered short-term rates since July, reducing the cost of funds to banks.

With their profits squeezed and with decreased demand for their loans, most of the hard-pressed banks did not want to erode their earnings further by cutting their prime rates.

First National Bank of Chicago and a few other banks had lowered their prime recently, but the big banks held fast until the start of the year.

David Wyss, chief financial economist at DRI/McGraw Hill, said banks waited until now to reduce their prime to get an additional month of earnings on their business and consumer loans, which could help their first-quarter profits.

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