Magazine article American Banker

Banks Defy Tradition by Rising on Fed Hike

Magazine article American Banker

Banks Defy Tradition by Rising on Fed Hike

Article excerpt

Bank stocks again defied ancient wisdom and outpaced most other stocks last week despite another rise in interest rates.

Analysts cited the rapid response of banks, which increased their prime lending rates to match the Federal Reserve's credit tightening, as well as the likely prospect of a slowing economy.

The American Banker index of the 225 most-traded banking stocks advanced 0.71% in the five trading days ended last Thursday. By contrast, the Dow Jones industrial average improved just 0.12%.

"In the old days, the bank stocks always fell when the federal funds rate went up," said Thomas H. Hanley, the veteran bank analyst at CS First Boston Corp. "But the banks have once again done a good job of defending the spread between the funds rate and the prime."

The Fed last Tuesday lifted its target rate for overnight loans of bank reserves, the funds rate, by 50 basis points, to 4.75%.

Banks began increasing their prime rates to 7.75% within an hour.

The near-instantaneous response kept intact a 300-basis-point gap between the funds and prime rates that is historically wide but has been the norm for the last several years.

Mr. Hanley said he thinks banks will likely be unable to do this indefinitely. He expects the spread to narrow to 240 to 250 basis points during the next year as the funds rate climbs toward 5.5%.

Other analysts detect similar pressure. There are "growing tensions" between banks' consumer product managers and their asset-liability managers about the need to raise deposit. rates, according to Lawrence W. Cohn of PaineWebber Inc., New York.

The consumer marketers fret that the banks' base of deposit customers, which has grown little in several years, will be further damaged.

Their counterparts see no reason to raise funding costs before it is absolutely necessary. …

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