| Banks then use this money to make loans available to | | | | price leadership was put into place. |
| household and corporate borrowers. They then earn | | | | The interest rate charged by banks to large corporate |
| their profits by lending at an interest rate higher than | | | | clients is called the prime rate. This rate is well known |
| the rates they pay on their deposits. | | | | and often quoted in newspapers. Most large banks |
| The largest commercial banks in the US bank of | | | | charge the same or very close of the same price for |
| America, Bankers Trust Corporate, Chemical Bank, | | | | it. Frequent changes in the rate are avoided in order to |
| Chase Manhattan Bank, Citibank, Morgan Guaranty | | | | avoid destabilization and competitive warfare. When |
| Trust Corporation and Wells Fargo, and many others | | | | money market conditions changes enough and other |
| compete with each other to make loans available to | | | | interest rates have risen or fallen substantially, prime |
| large corporate clients. The interest rates they charge | | | | rate changes occurs. |
| corporate clients for loans are the main form of | | | | Only then, one of the major banks announces a |
| competition, a price competition, in this case. When this | | | | change in its prime rate, and the other banks quickly |
| competition becomes aggressive, the interest rates | | | | follow suit. Banks take turns as leaders from time to |
| they charge have a tendency to fall, and so do their | | | | time, but when a changed is announced, the other |
| profits. To avoid this aggressive competition, a form of | | | | banks will immediately follow within two or three days. |