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Chemical Bank, Marine Midland Cut Prime Rates

October 20, 1987

NEW YORK (AP) _ Chemical Bank and Marine Midland Bank, which jumped ahead of the industry last week by raising their prime lending rates to 9.75 percent, today rejoined other major banks at 9.25 percent.

It was the first cut since July 1986 in the prime rate, which banks use as a base interest rate for a variety of corporate and consumer credit.

Last week, Chemical and Midland were alone among major U.S. banks in raising their prime rates to 9.75 percent from 9.25 percent.

Banks had increased the rate to 9.25 percent from 8.75 percent on Oct. 7.

Ken Herz, a vice president at Chemical Bank, said the bank lowered its prime lending rate ″in response to a rather significant decline in short-term rates over the past 24 hours.″

He said, for instance, that a key bank lending rate, the London Interbank Offered Rate, was at 9.25 percent when Chemical raised its prime rate last week but that it had since fallen to 8.375 percent. Three-month certificates of deposit were trading at 9.05 percent last Thursday and but were trading today at 8.1 percent, he said.

Changes in short-term rates are significant because they affect how much banks must pay for funds, and are what banks use for determining the interest rates they charge.

In the bond markets today, interest rates plunged as bond prices soared after investors shifted funds from the battered stock market into bonds. The yield on the Treasury’s closely watched 30-year bond was quoted at about 9.45 percent at around 9:30 a.m., down sharply from 9.94 percent late Monday.

The move by the banks followed a pledge today by Federal Reserve Board Chairman Alan Greenspan to provide the necessary liquidity to protect the financial markets from a run fueled by margin calls in the wake of the stock market’s plunge.

In a one-sentence statement issued before the opening of the market, Greenspan said, ″The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.″

James Christian, chief economist for the U.S. League of Savings Institutions, said the statement means that banks caught short of cash because of demands from large customers, such as brokerages, would be able to borrow from the central bank.

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