Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, September 16, 1993 TAG: 9309160084
SECTION: BUSINESS PAGE: B8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Starting what so far is hardly a trend was Virginia's usually conservative Central Fidelity Bank. It and Southwest Bank in St. Louis, Mo., cut their primes from 6 to 5 3/4 percent.
The move means a reduction for Central Fidelity customers in all interest rates tied to prime, said Peggy Cummings, spokeswoman for Central Fidelity in Richmond.
While banks generally lend money at prime rate only to their most creditworthy commercial customers, such as small and medium-sized businesses, consumers feel the impact of the change in home equity lines and some short-term loans.
Other consumer rates, including credit card rates, also are pegged at a certain number of percentage points above prime.
"We want to be more aggressive," Cummings said. "We want the market out there to know we want to make loans."
Indeed, Central Fidelity's announcement stressed its program earmarking $1 billion "for loans to creditworthy Virginia companies in need of cash funds to foster growth and to invigorate our Virginia economy."
The bank's president, Lewis N. Miller Jr., said interest rates in general have fallen to their lowest levels in more than 20 years, but the prime hasn't been reduced in a year. The banking industry has been negligent in providing sufficient incentives for small businesses to borrow and bolster the weak economy, he said.
While Central Fidelity has always prided itself on being conservative, it has wanted to expand its business lending operations aggressively, he said.
But Miller said Central Fidelity executives didn't figure cutting the prime rate now was too large a risk - he thinks a general cut in the prime rate is inevitable.
Central Fidelity not only led Wall Street, it also scooped Southwest Bank of St. Louis, a tiny Missouri bank that has over the years led the way when banks move to raise or lower prime rates. Within minutes of Central Fidelity's announcement, Southwest Bank announced it, too, would cut its prime.
The last time the prime rate was below 6 percent was in December 1972. The last time the rate was cut was in July 1992, when it dropped from 6 1/4 to 6 percent.
"There's nothing all that mysterious about it, when every other rate is trending down," said Pat Raines, an economist at the University of Richmond.
Ray Owens, an economist with the Federal Reserve Bank in Richmond, said the general market for interest rates has dropped.
The 30-year Treasury rate, the government's bond rate to which many mortgage rates are pegged, has declined over the last eight to 10 weeks, he said, so Central Fidelity is following the market.
The Federal Funds rate, the interest rate at which banks lend money overnight to one another, is below 3 percent, Raines said. Other short-term rates, such as the commercial paper rates at which the country's biggest companies borrow, also have dropped.
Asked whether other banks will follow, Owens said the markets suffered "a slight inflation scare" Tuesday, when the consumer price index showed a higher-than-expected increase.
An inflationary trend would prompt the central bank to push interest rates upward.
Long-term interest rates rose all day Tuesday and Wednesday morning, but fell back Wednesday afternoon, Owens said.
If the rate drops or even stabilizes, he said, other banks may lower their prime as well.
R. Jeep Bryant, spokesman for First Union National Bank of Virginia, said its prime didn't change Wednesday, but the bank is watching the interest rate market closely.
Normally, Virginia banks - including Central Fidelity - wait for all the big New York and California banks to act before cutting their prime rates.
Crestar Bank, Signet Bank, NationsBank and First Virginia Bank all said they planned no change Wednesday.
Knight-Ridder/Tribune news service contributed to this story.
by CNB