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Analysts Expect Banks To Match 10 Percent Prime at Bankers Trust

May 16, 1985

NEW YORK (AP) _ The major banks probably will follow the lead of Bankers Trust and cut their prime lending rates over the next few days to 10 percent, the lowest level for the key business-borrowing charge in 61/2 years, analysts said.

Bankers Trust, the nation’s eighth-largest bank, announced a half- percentage point reduction in its prime rate at midday Wednesday, but none of its main competitors immediately followed suit.

Analysts had been predicting a cut in the prime rate for several weeks because the interest rates set in the money-markets, where banks get a sizeable portion of their lendable funds, have fallen.

″Interest rates have been trending down since March,″ said Livia Asher, who follows bank stocks for the investment firm First Boston Corp. ″If anything, I’m kind of surprised that it hasn’t happened sooner.″

Lawrence Cohn, who follows the banking business for the investment firm Dean Witter Reynolds Inc., said other major banks probably would match Bankers Trust’s cut. But, he added, ″they will probably drag their heels.″

He said the banks want to savor as long as they can an environmment in which the interest rates they are paying for funds has been falling more rapidly than the rates they get on their loans.

Cohn said banks have resisted suggestions that lower lending rates could revive slow growth in lending volume. ″Their perception is that the economy has not shown a lot of life, and that there is not a lot of point to stimulating demand that is not there,″ he said.

The reduction in the prime rate was the first in the industry since mid- January and put the prime at its lowest level since October 1978.

The decline is of particular importance to commercial borrowers whose rates are often tied to the bank’s prime rate, sometimes known as the reference rate.

Large businesses are often able to borrow at rates below the prime rate, while many smaller borrowers frequently must pay more.

Although there is no direct link, the prime rate reduction could also foreshadow declines in consumer rates on home equity, auto, student and mortgage loans, analysts said.

The prime rate is also important to Third World borrowers, many of whom pay interest charges pegged to the prime rate.

William Gray, who follows the banking and thrift stocks for E.F. Hutton & Co., said a half point reduction on rates for the $225 billion in loans outstanding to the three biggest Latin American lenders alone - Brazil, Mexico and Argentina - would mean a savings of about $1 billion in interest charges.

Thomas Parisi, a Bankers Trust spokesman, said the prime rate cut reflected declines in rates ″pretty much across the board″ on money market instruments that the bank uses to get funds.

For example, the average yields on six-month certificates of deposit fell to 8.75 percent in April from 9.60 percent in March.

″Our own judgment is the decline is a real decline and our expectation is that rates would either stabilize at this level or, perhaps, trend down still further,″ Parisi said.

The prime rate fell steadily in the last three months of 1984, starting Sept. 27 when it was cut to 12.75 percent from the 13 percent level that had prevailed for three months.

The last time major banks cut the prime rate was Jan. 15, when it was reduced by a quarter percentage point to 10.5 percent.

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