Leadership in commercial banking prices

Banks then use this money to make loans available to domestic and corporate borrowers. They then make their earnings by borrowing at an interest rate higher than the rates they pay on their deposits.

The largest commercial banks of the US Bank of America, Bankers Trust Corporate, Chemical Bank, Chase Manhattan Bank, Citibank, Morgan Guaranty Trust Corporation and Wells Fargo, and many others, compete with each other to offer loans to large corporate clients . The interest rates they charge corporate clients for loans are the main form of competition – price competition, in this case. When this competition becomes aggressive, the interest rates they charge tend to fall, as do their earnings. To avoid this aggressive competition, a form of price leadership was implemented.

The interest rate that banks charge large corporate clients is called the prime rate. This rate is well known and is often quoted in the newspapers. Most of the big banks charge the same price or almost the same price. Frequent rate changes are avoided to avoid destabilization and competitive warfare. When money market conditions change enough and other interest rates have risen or fallen substantially, changes in prime rates occur.

Only then does one of the major banks announce a change in its prime rate, and the other banks quickly follow suit. Banks take turns as leaders from time to time, but when a change is announced, the other banks will follow immediately within two to three days.