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BofA, Wachovia Cut Prime: Impact On Lending Unclear

It's going to take more than a mere interest rate cut to raise the banking industry's comfort level.

In reaction to an unprecedented interest-rate cut by six central banks throughout the world, major U.S.-based commercial banks today began lowering their prime lending rate, a benchmark that lenders typically charge their best customers, to 4.50 percent from 5.00 percent, effective immediately.

Leading the charge: Bank of America and Wachovia. Others banks will assuredly follow.

Still there are already signs this rate cut won't be enough to jump-start corporate lending. The banking industry remains skittish about so-called "counterparty" transactions, which means lenders still can't count on borrowers ability to pay back. Moreover, banks remain nervous about lending to each other, which is hindering loan-generation and other bread-and-butter banking transactions.

Many giant U.S. banks aren't anxious to come out lending. They continue to horde cash to boost capital reserves, a defensive posture that should help in the event of another round of deep credit-related losses or asset writedowns.

One major concern is Bank of America, whose CEO Kenneth Lewis has recently been on an acquisition binge with his purchases of mortgage-seller Countywide Financial and investment house Merrill Lynch. Earlier this week, BofA announced a 68 percent earnings drop and a dividend cut. To shore up its capital base, the bank sold nearly $10 billion in stock, at $22 per share, to private investors. Should the recession linger, BofA may need another $20-to-$30 billion in fresh capital.
Meanwhile, Wachovia's fate is unclear. Right now, there's an uneasy temporary truce between its two suitors,Citigroup and Wells Fargo. Indications are the two banking powers will end up dividing Wachovia's deposits and other business units.
There's another reason why this interest rate will have little impact on lending: There aren't that many eager customers right now. As the earnings reporting season gets underway, major corporations are announcing significant profit declines or lower earnings forecast for the end of this year and beginning of 2009.
And for the first time in many years, consumer spending is down, as households reel from declining home values, not to mention growing credit card and other consumer-related debts.

Against such headwinds, what can one interest rate cut really accomplish?

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