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Two Regional Banks Drop Prime Rate to 5.75 Percent

September 15, 1993

NEW YORK (AP) _ Two regional banks announced Wednesday that they were lowering their prime lending rates a quarter-point to 5.75 percent, the lowest in 21 years. Economists were divided about whether major commercial banks would follow suit.

Changes in the prime rate are closely followed, since bankers use it as a basis for calculating some loan rates for businesses and consumers. It is not widely used for setting mortgage rates.

Central Fidelity Banks Inc. of Richmond, Va. reported the change first and said it took effect immediately. Southwest Bank of St. Louis, known for taking the lead in prime-rate changes, said its prime rate cut is effective Thursday.

The two banks cited the weak U.S. economy in making the rate change, and said they hoped their move would encourage businesses to take out loans. Several leading U.S. banks - Citicorp, BankAmerica Corp., Chemical Banking Corp., NationsBank Corp. and J.P. Morgan - said in response to a question Wednesday that they were not immediately lowering their rates.

The major banks would probably not follow suit, several economists said, since they expected the U.S. Federal Reserve System to raise interest rates over the next year, not drop them. Those rates influence what banks charge.

Banks do, however, have plenty of room to lower rates, since the spread between their borrowing costs and lending rates, known as a bank’s margin, is about double the historical gap, economists said.

Robert Brusca, chief economist at Nikko Securities International Inc., said he expected banks to cut the prime rate because of their strong profits.

But Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis, disagreed.

″Banks are very defensive of their attractive margins right now,″ he said.

Sohn said loan demand remained sluggish despite low rates. ″Cutting the prime is not going to generate more loans. So the only thing banks can do is protect margins,″ he said.

The prime rate used to apply to loans to a bank’s best customers, often big businesses. These days, though, large companies can borrow money more cheaply by going directly to financial markets, or by taking out loans linked to international lending rates between banks.

The prime rate is therefore more significant for loans for small or medium- sized businesses.

″Regional banks that lend to small business customers might be willing to follow suit,″ and drop their prime rate, said David Jones, an economist with Aubrey G. Lanston & Co. He said he doubted bigger banks would change their rates.

The prime rate was last changed in July 1992, when most major banks lowered it from 6.25 percent to 6 percent. It has not been at 5.75 percent since late 1972.

Denny Niedringhaus, senior vice president at Southwest, said the bank wasn’t anticipating any change in interest-rate policy by the Federal Reserve. Rather, he said, the company had made its decision based on the drop in long- term interest rates over the past year, the sluggish economy and weak loan demand.

Lewis N. Miller Jr., president of Central Fidelity, cited similar reasons. Banks, he said in a statement, had been ″negligent in providing sufficient incentives for small business to borrow and bolster our weak economy.″

He said the bank had earmarked $1 billion for loans to credit-worthy Virginia companies.

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