Some Banks Cut Prime Rate to 11 1/2%, But 1/4-Point Drop Is Less Than Expected
NEW YORK -- Citibank and several other major banks trimmed their prime lending rate to 11 1/2% from 11 3/4%, a much smaller cut than had generally been expected.</br></br>The banking industry's own borrowing costs have tumbled in recent weeks, leading many analysts to predict the prime, or base, fee on corporate loans would be slashed to 11 1/4% or even 11%. "The cut was surprisingly small," said William V. Sullivan Jr., a senior vice president at Dean Witter Reynolds Inc.</br></br>The Federal Reserve System last week cut its discount rate, the fee charged by the Fed on loans to banks and savings institutions, by half a percentage point to 8 1/2%. Rates on other types of bank borrowings have plunged more than 2 1/2 percentage points since late summer. But the prime rate has fallen only 1 1/2 percentage points from its high of 13% this year.</br></br>Philip Braverman, chief economist at Briggs, Schaedle & Co., called the slight reduction in the prime rate "a pre-emptive strike," designed to sway other banks from cutting their rates further. Banks are "trying to lock in a healthier profit margin between their costs and lending rates," he contended.</br></br>Federal regulators have been pressuring banks to bolster their capital base to strengthen the financial system. This is encouraging bankers to drag their heels in passing on lower interest rates, said Mr. Sullivan of Dean Witter.