Big Banks Move Quickly to Cut Prime to 9%

Major banks began lowering their prime rates to 9% today, slashing the key lending rate by half a percentage point within minutes of a surprise rate cut by the Federal Reserve.

J. P. Morgan & Co. and First National Bank of Chicago, the nation’s fifth- and 12th-largest banks, respectively, were the first to announce the cut, which is the second drop in the prime rate in five weeks.

They were followed by Citibank, the nation’s largest banking company, and San Francisco-based BankAmerica Corp., the second largest.

The Fed announced early today that it was cutting the discount rate--the interest it charges on loans to member banks--to 6% from 6.5%. It was the second decline in six weeks but only the third drop since August, 1986.

The Fed has been under pressure from the Bush Administration to lower interest rates to prevent the recession from deepening. A cut in the discount rate lowers banks’ cost of funds and encourages banks to lower the interest they charge on a wide variety of business and consumer loans.

With the economy losing steam, “the atmosphere was ripe for another cut in the prime,” said Dick Stillinger, banking analyst for Keefe, Bruyette & Woods, a New York investment firm. Still, he said, he was “surprised that it was cut so promptly.”

The prime rate is a base used by banks for pricing a range of businesses and consumer loans, including many types of mortgages.

When the Fed cut the discount rate in mid-December, it took several days for the nation’s major banks to follow suit. Initially only a handful of regional banks trimmed the prime, and then only by a quarter of a percentage point.

This time, however, banks wanted to avoid criticism that they were “dragging their heels” and profiting from a wide interest rate spread at a time when many of the nation’s banks are under serious financial pressure, an official said.