Too Much in the Bank

On Long Island last week, a young executive who is about to buy a house persuaded his bank to give him a whopping $42,500 mortgage at the reasonable rate of 5 3/4%. Chicago banks, whose mortgage rates ran as high as 6% just 18 months ago, are now charging as little as 5 1/4%. One Brooklyn bank is so eager to shovel out mortgage money that its appraisers cruise out to house sites in telephone-equipped cars so that they can report back faster. Says one San Francisco banker: "I'm dickering for a house loan myself. It's a good time to do it."

Times are good for borrowers because the nation's banks are caught in their own version of the profit squeeze. After the Federal Reserve boosted the permissible rate on savings deposits to 4% last January, commercial banks found themselves obliged not only to pay higher interest but to pay it on a lot more money. The higher interest rates by themselves attracted new depositors, and since Blue Monday many more Americans have shifted out of stocks and into savings accounts. So far this year, savings deposits in the nation's Federal Reserve member banks alone have jumped by almost $2 1/2 billion. Grumps one Los Angeles banker: "We've got money coming out our ears."

The bankers' chief problem is to find ways of making this money earn enough to cover the increased interest they must pay on it. Banks are pushing personal loans with vigor--as one New Yorker learned when she went to withdraw vacation money from her savings account and was talked into taking a loan instead. Above all, with demand for business loans soft because of sluggish capital spending, bankers are concentrating on the mortgage market--and cutting their long-term rates to attract mortgage business.

Curiously enough, the Government is working simultaneously to raise short-term interest rates. The thinking at the Treasury and the Federal Reserve Board goes this way: since the Government's two-year-old policy of easy money has not stimulated much borrowing for business expansion, a slight tightening of short-term rates should not affect capital spending very much--but should help slow the nation's gold outflow by narrowing the spread between interest rates at home and abroad. In pursuit of this new policy the Federal Reserve has lately been reducing the nation's lendable money supply, and the Treasury has been trimming the amount of short-term credit available across the country by about $200 million a week. As a result, the interest rate on 13-week Treasury bills last week hit a two-year high of 2.93%.

But the Fed disclaims any intention of raising its more important discount rate, upon which banks base their prime rate, or most favored price for business loans. For the past two years, the discount rate has been held at 3% and the prime rate at 4%-4 1/2%. Says Chicago's Tilden Cummings, president of the Continental Illinois National Bank & Trust Co.: "Until business improves very substantially, you won't see much change in the prime rate."

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