Interest rates that banks pay savers have been dropping for two years. At the same time, charges for consumer loans, especially on credit-card balances, remain stubbornly high.

The banking industry says the increasing spread is justified because of higher delinquency and default rates resulting from the recession, pressure on earnings and regulatory demands that banks boost capital ratios and reserves. Observers say banks are using fat profit margins on the consumer side to plug losses from bad commercial loans.

"Consumers are caught in a massive squeeze," said Robert K. Heady, publisher of the weekly Bank Rate Monitor, which tracks rates nationwide. "Short-term savings rates have dropped like a rock while consumer rates have risen."

According to Bank Rate Monitor, as of April 24 the average yield of a six-month certificate of deposit has fallen 3.25 percentage points since April 1989, from 9.34 to 6.09 percent -- a nearly 35 percent percent drop that Heady termed "staggering." The yield for one-year CDs has fallen 3.15 points, from 9.51 percent to 6.36 percent, and five-year CDs, 1.96 points, from 9.20 percent to 7.24 percent. Interest paid on consumers' money market accounts has dipped from 6.62 percent to 5.44 percent.

During the same period, the average credit-card rate has increased from 18.09 percent to 18.92 as of April 30, and the average rate for unsecured personal loans has risen from 17 to 17.27 percent. Auto loans have declined only slightly, from 12.54 to 11.88 percent.

"The numbers don't lie. It's very clear that the consumer is paying the tab for the banks' bad commercial loans," Heady said.

"We're seeing some banks pay as little as 4 1/2 percent yield on a one-year CD and charge 18 percent on credit cards. In retail parlance, that's a 300 percent markup on the cost of their money," Heady said.

The gap has widened despite the Federal Reserve's continuing push to lower rates. Tuesday's cut in the discount rate -- the amount the Fed charges banks for borrowing -- to 5.5 percent was the third since Dec. 18 and puts it 1.5 percent under the April 1989 level. The Fed's action also pushed the key federal-funds rate -- what banks charge each other for overnight loans -- down to 5.75 percent from 6 percent. Yesterday in response big banks cut their prime rate -- what they charge their best commercial customers -- a half-percent to 8.5 percent.

Virginia Stafford, spokeswoman for the American Bankers Association, based in Washington, said that added costs and losses associated with delinquencies, defaults and bankruptcies due to the recession were partly to blame for the widening spread between consumer loan rates and savers' rates. Since 1989, she said, delinquencies -- payments more than 30 days past due -- on installment loans for goods such as cars and boats have increased 12 percent. In addition, she said, there was a lag time between the drop in the banks' cost of funds and a

drop in consumer loan rates.

"Hopefully, as the recession subsides, consumer rates will come down," she said.

John Bowers, executive director of the Maryland Bankers Association, said bankers would not be quick to drop consumer rates until they were convinced the lower rates were "for real and not a quick blip downward."

And, he added, "Obviously, the banks are having tremendous earnings pressures, especially because of bad commercial loans. It's pretty tough to lower interest rates and erode your margins in cases like that."

But he said he eventually expects consumer loan rates to decline.

"CD rates and the prime rate almost immediately track capital markets," Bowers said. "Consumer rates are slower. . . . While interest rates have been higher here in the mid-Atlantic region because of stress and strain on financial institutions, I expect competitive pressures will push them lower." Industry observers, however, said rates on credit card balances appeared almost immune to market trends.

"Credit card rates seem to defy the laws of economic gravity," said Elgie Holstein, director of Bankcard Holders of America, a non-profit consumer group. "Nobody is saying they should match other rates, but they at least should track the overall trend. But, indeed, the trend lines are moving in opposite directions."

While other market rates are about half what they were a decade ago, credit-card interest rates are higher than 10 years ago, Holstein said.

"They have never gone down," he said.

Stafford noted that one-third of credit-card holders pay off their balances each month so they don't focus on the interest-rate level.

In defense of the rates, she cited "very high" administrative and operating expenses for credit cards as well as the fact that they are unsecured.

Heady and other industry observers, however, contended that the root reasons were neither high costs nor delinquency rates.

"The banking industry would have you believe that it's to counter bad debt, fraud, counterfeiting. The real truth is that the banking industry lobbied for years -- and were successful -- to push state usury laws higher, and they'll never let go for fear they'll never get it back," Heady said.

In Maryland, the cap on credit-card interest rates was raised in the early 1980s from 18 to 24 percent after an extensive campaign by the banking industry.

Holstein also dismissed claims about the high operating expenses.

"That's why we pay the annual fee," he said. "We didn't pay annual fees in the '70s. That was introduced in 1979 as a way to cover administrative costs. And the spread more than offsets delinquency rates."

Besides, he added, most delinquencies eventually are collected and card issuers have added late fees to cover costs associated with them.

Robert W. Johnson, a senior research associate at Purdue University's Credit Research Center, said the higher delinquency and loss rates were indeed a factor but said they existed because the big issuers had expanded their business by courting riskier segments of the population.

"There's been a considerable effort to broaden the credit-card market," he said, and people in lower income and age groups who previously could not get credit cards now have them. "From the consumer's point of view, people who wouldn't have had access to all this wonderful plastic that opens all these doors now do," he said.

Robert McKinley of RAM Research, a credit-card tracking service in Frederick, blamed a lack of competition on credit-card interest rates for their failure to drop.

"There's no real serious competition on credit-card rates," he said, adding that he did not foresee any change in rates.

"You're not going to see these big issuers rolling back rates," he said.

Among the 10 biggest credit-card issuers in the nation, he said, the prevailing interest rate is 19.8 percent. Those 10, he said, control 51 percent of the market and 108 issuers account for 96 percent. Citicorp alone, the nation's biggest issuer, has 27 million credit-card accounts.

"These credit-card portfolios have been the salvation of many banks," McKinley said, citing Baltimore-based MNC Financial, parent of Maryland National Bank, as a prime example. MNC spun off its MBNA credit-card unit in January in a public stock offering that raised more than $1 billion.

"Chase [Manhattan] is emphasizing its credit-card portfolio to help offset problems in other areas," he added.

These big players, McKinley said, compete primarily through offering bells and whistles, such as purchase-protection plans and lowest-price guarantees.

The strategy, McKinley said, was to "get consumers' minds off interest rates and focus on enhancements."

But, McKinley said, consumers also played a role because insignificant numbers shift their accounts to take advantage of lower rates.

"Consumers in a way are to blame," he said. "They let banks get away with it.

Instead of looking first at the interest rate, he said, consumers tend to focus on the annual fee and other services.

The best chance for lower rates, McKinley said, would be for American Express to make its variable-rate Optima card available to the general public. "It's possible that before the year's out American Express may take Optima nationwide," he said.

Said Bowers: "I think there's going to be pressure for those rates to drift down below the 18 percent level," he said. "New entrants will be coming in."

The ABA's Stafford said the vast number of card holders belie arguments that consumers are getting a raw deal.

"If consumers are exercising their prerogatives, they obviously value the cards," she said. "They assert their opinions in the marketplace. It they don't feel they're getting a good deal, they'll go down the street."

The top 10

Here are the top 10 credit-card issuers as ranked by the value of their outstanding accounts, and the annual interest rate that each charges for standard credit cards:

1. Citicorp 19.8%

2. Sears Discover 19.8%

3. Chase Manhattan 19.8%

4. Bank of America 19.8%

5. First Chicago 19.8

6. MBNA America 19.8%

7. Am. Express Optima 16.25%*

8. Manufacturers Hanover 19.8%

9. Bank of New York 17.77%*

10. Household Bank 21%

*Variable rate

dTC