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Finance Institutions react to lowest prime since the 1960s

Finance: Loans, Refinancing Easier to Get, But Banks Begin to Feel the Squeeze

Convair was making passenger jets and Castro sparred with the Kennedys the last time interest rates were this low.

In its ninth reduction this year, the Federal Reserve on Oct. 2 cut its benchmark interest rate , the federal funds target rate , from 3 percent to 2.5 percent, setting it at its lowest level since 1962.

It was the ninth reduction this year in the rate for overnight loans among banks.

Also reduced was the Fed’s discount rate on loans to banks. That dropped from 2.5 percent to 2 percent. Banks followed those moves by cutting their prime rates.

The cuts bode well for San Diego companies engaged in research and development, particularly those in the biotech, telecommunications and other high-tech fields.

That is according to Marney Cox, economist with the San Diego Association of Governments, who said the cuts will make funding more available to those sectors.

The new cuts equal $100,000 in savings for a company all the way out on a $10 million line of credit, said Robert Horsman, president and CEO of San Diego National Bank. His institution primarily serves businesses.

Bankers like Horsman, however, will feel a squeeze with the rate cuts.

Banks Feeling Squeezed

As they feel the effects of lower interest rates, it’s difficult for financial institutions to lower fixed costs like salaries, light and rent, said William McLaurin, president and CEO of the Bank of Coronado.

Banks with aging certificates of deposit also find themselves having to pay higher interest rates on them. Meanwhile, as CD rates slip, customers will have less incentive to lock up money in them.

But there should be some good loan deals around. Some mortgages are probably available for 6 & #733; to 7 percent, said San Diego National Bank’s Horsman.

One bank customer, he added, has refinanced his mortgage three times this year.

Several executives warned the Fed’s rate cuts do not translate directly into lower consumer loan rates.

Yet at the very least, they create a buzz.

Consumers are more aware they can refinance, said Brian Reed, president of PeopleFirst.com. The San Diego company provides auto loans.

Credit Cards Largely Unaffected

Unsecured loans through credit cards will stay in the 18-24 percent range, said Joe Nersesian, executive vice president for lending and COO of Chula Vista-based North Island Financial Credit Union. It stays in that range because the risk in a portfolio of such loans is high, he said.

If customers do not like the prospect of 18 percent interest, he said, they should look into another product.

The Fed’s moves came in response to the Sept. 11 terrorist attacks, the agency said in a statement.

“The terrorist attacks have significantly heightened uncertainty in an economy that was already weak,” said the statement. “Business and household spending as a consequence are being further damped.”

Sandag’s Cox said the community was already seeing some indications that the Fed’s earlier rate reductions were having an impact during this quarter.

However, because of Sept. 11, those indications may not be as apparent.

“Normally, it takes about one year before impacts from rate cuts are felt, so that would be in the fourth quarter,” he said.

If the Sept. 11 attack had not happened, the Fed might have kept the rate as it was, or only reduced it by a quarter-point, Cox said.


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