Rates' Swift Descent Leaves Small Banks Dizzy

December 24, 1991|By Peter H. Frank

This year's steep drop in interest rates might have borrowers rejoicing, but it has small community bankers scrambling.

Friday's move by the Federal Reserve to reduce the discount rate -- the amount banks are charged to borrow money -- to 3.5 percent was the fifth drop of its kind this year.

The move was heralded as a much-needed spur in the economy's side.

But while the Fed sets monetary policy, these local institutions set the monetary reality that customers must live with.

And when things change so fast, the corner bank can have a hard time keeping up.

"It's a real problem," said Kenneth A. Guenther, executive vice president of the Washington-based Independent Bankers Association of America. "Interest rate moves of this magnitude -- I don't care how you cut it -- are disruptive."

Banks and thrifts face the same potential problem.

Many institutions have tried to shore up their balance sheets by staying as liquid as possible and keeping their investments short-term.

While the strategy helps make the institution safer, it has cost them. With rates down, the amount earned on that extra cash is also down. Andbecause banks must still pay higher interest on certificates of deposit taken out months ago, for example, profits start to get squeezed.

Some institutions are finding the good times for borrowers just too good.

James H. Ritter, president of Hamilton Federal Savings and Loan Association in Hamilton, was quoting a 10-year mortgage rate of 8 percent at the end of last month. The rates were quoted in the newspaper on a Sunday, and by Monday morn

ing, the phones were jumping.

"I can't process them fast enough," Mr. Ritter, the head of the $125-million thrift, lamented. "We had to stop."

At Arundel Federal Savings Bank, a $180 million thrift based in Brooklyn, the lower rates have meant rethinking years of training. Rather than bringing in new and desired customers, the low interest has forced the thrift to change its attitude.

"You train your people all these years to look forward" to getting new customers, said Robert C. Gehrman, president of the three-office savings and loan. "But in this market, it's really costing us."

The thrift, trying to reward its longtime neighborhood customers,

has kept its savings rates at 5.5 percent.

Unfortunately, Mr. Gehrman said, that tactic has meant people from throughout the city have been wanting to open accounts -- more than the thrift can handle. The changes in rates are happening faster than the thrift can react.

Arundel Federal decided yesterday morning to drop the rate paid on a one-year CD to 5.70 from 6.20 percent.

In turn, consumers are also caught by the double-edged sword of lower rates.

"If you're heavily in debt, it would be a welcome relief," said Bernard G. Malinowski, an executive vice president at Commercial and Farmers Bank in Ellicott City. "If you're a retired couple living on interest, it's bad news."

The cut in the amount that banks earn on their money translates into similar cuts in the rates savers earn on their deposits. Many savers, familiar with the ups and downs in the rates offered by CDs, now are seeing for the first time a drop below the familiar 5 percent in the interest paid on their passbook accounts.

Mr. Malinowski, who has been in the business since 1957, said his bank would be lowering the interest paid on savings accounts to 4.5 percent for the first time he can recall.

The drop in rates is "not a full-blown blessing," Mr. Guenther said, summing up the industry's feeling. "Let's hope rates have now bottomed out."

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