A daylong campaign by the nation's biggest banks to defy the Federal Reserve and hold the line on interest rates came to an end late Thursday when Bank of America ( BAC) said it would drop its prime rate to 4%. The nation's third-largest bank became the first lender to reduce its prime rate from 4.25% in the wake of the Fed's quarter-point cut. The Charlotte, N.C.-based bank took the action shortly after the close of the trading day. Moments later, Chicago-based Bank One ( ONE) took a similar action. Others are expected to quickly follow suit.
We Were Soldiers
For a time, it looked as though the banking industry would successfully send a message to the Federal Reserve expressing unease with the Fed's latest interest rate cut on Wednesday. For an almost unprecedented 24 hours, the nation's major banks refused to bow before Washington and trim their prime. Banks usually move to reduce the prime rate -- the interest they charge their best customers -- within hours of a Fed move. "It's not something we've seen in any of the prior rate cuts to this point," said Greg McBride, a Bankrate.com analyst. "It's surprising they have taken this course of action." The Fed funds rate, the interest banks charge each other on overnight deposits with the Federal Reserve, is 1% after Wednesday's action. The move is designed to pump liquidity into the money system but would've been stripped of some efficacy if major commercial banks didn't follow suit. The Fed cut was the 13th by the nation's monetary policy makers and maybe the most controversial. That's because many banks are already feeling the pinch of the previous easings. While the Fed cuts have spurred a boom in home mortgage lending and refinancing, the low rates also are eating into the profit margins of many banks' lending operations.
The conventional wisdom is that a Fed rate cut is good news for the nation's banks because it spurs more consumer borrowing and reduces banks' own borrowing costs. A problem arises, however, when rates fall so low that the amount banks can charge their customers in interest is closing in on what they themselves pay for money.