Chemical Banking cuts prime to 6.25% for a 15-year low

April 14, 1992|By Thomas Easton | Thomas Easton,New York Bureau

NEW YORK -- Chemical Banking Corp., parent of the nation's second-largest bank, reduced the rate it charges on loans to top customers yesterday to the lowest level since 1976.

The bank's move was not echoed by other major lenders, blunting its potential impact on the economy.

Chemical's reduction in its prime rate to 6.25 percent from 6.5 percent comes in the wake of Friday's deliberate and effective effort by the Federal Reserve to drive down the wholesale cost of funds paid by financial institutions. Its success raised hopes that the cuts would resound through the economy and invigorate business activity.

Chemical spokesman Ken Herz said the cut "reflects lower rates in the marketplace and the desire to pass that on to our customers."

While the prime is seldom used directly by banks anymore, numerous rates are tied to it and it is one of the most visible symbols of the cost of credit.

Chemical's decision immediately focused scrutiny on the policies of other major banks, but none responded and it remained far from certain whether any would do so in the near future.

"This one will take a little time to follow," said John Leonard, banking analyst for Salomon Brothers.

Recent cuts by the Fed notwithstanding, some key intermediate rates tied to bank funding costs have risen in past months, Mr. Leonard said. Moreover, he suggested, many banks would prefer waiting until after the first of the month to delay the resetting of numerous loans with adjustable rates.

Banks might also be unwilling to reduce the price they charge for money while they are still suffering from a deluge of bad loans.

"Usually some bank breaks the twig by lowering its prime and there's an avalanche as others follow," said Robert Falconer, a senior vice president at Aubrey Lanston & Co., a dealer in government securities. "It may take longer this time."

In moving ahead of the pack, Chemical might be responding to its own peculiar circumstances. The bank recently raised about $1.5 billion in equity tied to its merger with Manufacturers Hanover Trust. "Given the extra capital they raised, they wanted to advertise a little to see that if there is any extra loan demand it comes to them," Mr. Leonard said.

Since the onset of the recession, other banks have gone almost to the other extreme, advertising an unwillingness to lend.

In the past, said Martin Zimmerman, chief economist at Ford Motor Co., the prime rate on bank loans typically differed from the federal funds interbank overnight rate by 1 1/2 to 1 3/4 percentage points. But since the recession began, the difference has been about 2 1/2 to 2 3/4 percentage points.

The difference between bank borrowing and lending costs typically widens in troubled times and rapidly contracts as a recovery emerges. But this time's continuing difference suggests lenders have "remained in recession mode," said Northern Trust Co. economist Robert Dederick.

Even if Chemical's move is broadly adopted, many economists question whether another slight reduction in rates will galvanize growth. "Rates have been low enough for half a year," said Albert Matamoros, a Lancaster, Pa., consulting economist with Offutt Securities.

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