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Manufacturers Hanover Reduces Prime Rate to 10.5 Percent

January 15, 1985

NEW YORK (AP) _ The prime lending rate at one of the nation’s biggest banks, Manufacturers Hanover Trust Co., has been reduced to its lowest level in 17 months.

Manufacturers Hanover, the nation’s fourth largest bank, anounced Monday it was making a quarter-point reduction in its prime rate from the 10.75 percent rate which has prevailed at major banks since mid-December.

The last time a major money-center bank had a prime rate as low as 10.5 percent rate was for about five months ending in early August 1983. The last time the prime rate was below 10.5 percent was October 1978.

The latest reduction follows a steady decline in money market interest rates, which determine how much banks must pay to borrow funds for lending.

Banks have in fact been criticized for reducing their prime rate too slowly.

Elliott Platt, a senior vice president at the investment firm of Donaldson Lufkin & Jenrette Securities Inc., said that ″cuts in the prime have been long justified based on banks’ cost of funds.″

He said two of the chief sources of banks’ funds had been trading near 8 percent for several weeks. Those are federal funds, which are short-term loans between banks, and jumbo three-month certificates of deposit, sold in denominations of $100,000 or more.

″They have been delaying prime rate cuts to protect their profit margins,″ Platt said.

But bankers have defended the pace of the decline by saying that the overall costs of their funds has declined more slowly than the decline in short-term rates.

″The reason for the new rate is we feel it more accurately reflects our current lower cost of funds,″ said John Meyers, a spokesman for Manufacturers Hanover, the nation’s fourth largest bank.

The prime rate is the base upon which banks compute interest charges on short-term business loans. Their most creditworthy customers frequently pay less than the prime rate while smaller businesses typically pay more.

A regional bank, Southwest Bank of St. Louis, reduced its prime rate to 10.5 percent Thursday, but none of the major banks followed suit.

Manufacturers Hanover was the leader among the big banks in the last round of cutting the closely watched rate, trimming its prime by a half percentage point to 10.75 percent on Dec. 17. That reduction was matched over the next several days by other major banks.

The latest reduction was the eighth incremental decline in the prime since Sept. 27, when it was cut a full percentage point to 12 percent from the 13 percent rate that had prevailed since late June.

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