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Bankers Trust Cuts Prime Rate to 10 Percent

May 15, 1985

NEW YORK (AP) _ One of the nation’s largest banks, Bankers Trust, trimmed its prime lending rate to a 61/2 -year low, reducing it by a half percentage point to 10 percent effective Thursday.

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.″

No other big banks followed Bankers Trust’s lead Wednesday.

The reduction was the first in the industry since mid-January and put the key business-borrowing charge 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, some analysts also said the prime rate reduction could also foreshadow declines in consumer rates on home equity, auto, student and mortgage loans.

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

Last month, banks generally reported that their first-quarter earnings benefitted from widening differences between what they must pay to get funds and what they derive from loaning and investing that money.

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.

In addition to the money markets, banks get funds from consumer deposits and frequently borrow from each other. Those rates have also fallen.

Roert Heady, who publishes the newsletter Bank Rate Monitor, said its survey of 50 leading commercial banks, savings and loan assocations and savings banks nationwide showed the effective annual yield available on money market accounts fell to 7.65 percent as of Wednesday from 8 percent in mid- February.

″Reductions in consumer lending rates are overdue,″ he said from his office in North Palm Beach, Fla. ″This prime rate cut could provide the impetus for rate reductions across the board.″

The federal funds rate, the interest that banks charge each other for short-term loans, also has fallen - to an average efective yield of 8.27 percent in April from 8.58 percent in March.

First Boston’s Ms. Asher said the erratic movement of market-based rates earlier in the year, carrying them higher in February and March before turning lower again, might explain some of the hesitancy to reduce the prime rate.

She also said loan demand appeared to have slowed. ″I don’t think growth this year will be as strong as it was last year,″ she 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.

Last month, a regional bank, Texas Commerce Bank-Austin, cut its prime rate to 10 percent from 10.5 percent but a week later raised it back to 10.5 percent when short-term rates edged higher.

-05-15-85 1547EDT

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