Fed's interest-rate cut puts the squeeze on banks

July 09, 1992|By David Conn | David Conn,Staff Writer

What are lower interest rates doing to banks? Here's one indication:

On Monday, the first business day after the Federal Reserve lowered the discount rate by a half-point, to 3 percent, sales in T. Rowe Price Associates Inc.'s bond funds rose 145 percent compared with sales on July 2, the day before the Fed move.

That's only one small anecdote from the world of finance. But T. Rowe Price Vice President Steven E. Norwitz said it conforms with what his company has seen for more than a year as investors shift their money out of bank accounts and into mutual funds, hoping to increase their rate of return.

The Fed cut, which led to a decision by most banks to cut their prime lending rate to 6 percent from 6.5 percent, is beginning to put a squeeze on banks. Some now face the choice of preserving their profit margins or retaining deposits.

If banks fail to match the drop in consumer loan rates with a similar drop in the rates they pay for deposits, their profit margins shrink. But if they cut their rates on certificates of deposit or money market accounts further, they risk losing depositors to companies such as T. Rowe Price.

"We have been experiencing a slight exodus of deposits, as have the other banks in town," said James McAveney, chief financial officer at Loyola Capital Corp., parent of Loyola Federal Savings Bank.

Rather than cut its profit margins, Loyola decided this week to lower its Money Master savings account rate to 3.48 percent from 3.83 percent a week earlier. "My generation of people aren't used to that" rate, Mr. McAveney said. "They're used to at least 6 [percent] or 8 percent on deposits. I think it will probably accelerate the exodus" of deposits.

That might not be such a bad thing for some banks. With demand for loans as slack as it has been despite the low interest rates, few bankers are losing sleep over the loss of some deposits, analysts said. That's because without a supply of profitable borrowers, the banks must simply park their depositors' money in low-paying but safe government securities.

"Most banks have more deposits than they want right now," said Arnold G. Danielson of Danielson Associates Inc., Rockville bank consultants.

Provident Bank of Maryland lowered its savings rate two days before the Fed's move last week, to 4 percent for deposits under $10,000, but now finds its interest rate spread -- the difference between what it pays in interest and what it gets in interest -- is being pressured again, said Peter M. Martin, president of parent company Provident Bankshares Corp. "We may have to make another adjustment," he said.

Not all banks feel that way. Mercantile-Safe Deposit & Trust Co., while lowering its six-month CD rate this week to 3.5 percent from 3.75 percent, has decided not to reduce the rate on its regular savings account, which stands at 3.75 percent, said Josias Cromwell, a vice president for marketing at parent company Mercantile Bankshares Corp.

"We feel that is a rate that you want to be conservative about lowering," he said. That's because savings account customers begin to feel changes in their rates immediately.

Changing CD rates is less traumatic because it affects only depositors who sign up after the rate change.

Mr. Cromwell said the bank looks at its rates continuously and could make a decision on changing them at any time.

Rates are being restrained, but at companies such as T. Rowe Price, restraint is the last word on anyone's mind. The T. Rowe Price Adjustable Rate U.S. Government Fund, which invests in mortgage-backed bonds, has attracted $732 million from investors since it was launched in September, Mr. Norwitz said, making it the company's fastest-growing fund ever.

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