MADISON, Wis. - A new Filene Research Institute study offers tangible proof of the credit union difference, showing CU pricing to be consumer driven, while bank pricing is profit-driven.
"It's good news for credit unions," said Mark Meyer, newly appointed executive director at Filene, of the 65-page report, "A Comparison of the Loan Pricing Behavior of Credit Unions and Banks." "It provides some very statistical evidence and quantitative data that supports that the consumers really win for having a non-for-profit financial alternative and shows that credit unions are not pursuing profit maximization when other forces are at work."
Authored by Dr. William E. Jackson, financial economist and financial policy advisor at the Federal Reserve Bank of Atlanta and Filene fellow, the report said that credit unions do differ from commercial banks in how they set deposit and loan rates over the interest rate cycle. Jackson's analysis of 10 U.S. markets along with ten types of deposits and five types of loans showed that those differences are based on the profit orientation of the players.
In a nutshell-credit union pricing is pro-consumer. Banks, on the other hand, price for profit.
Jackson told The CU Journal that this study was triggered by his previous investigation on the dynamics between credit union and bank pricing.
"We know from that study that credit unions pay higher on deposits and charger lower on loans (than most banks)," he said. "What I wanted to find out from that is how these rates react over time, particularly over the interest rate cycle."
For commercial banks, Jackson reported evidence of asymmetrical pricing behavior consistent with profit maximization.
"Commercial banks tend to...lower rates on their deposits faster when the market rates are falling than they raise rates on deposits when market rates are rising," he wrote, noting that there appeared to be no significant asymmetrical pricing behavior on the loan side. "Taken together, these pricing patterns usually result in an increase in net interest income, and a corresponding increase in net profit, over the interest rate cycle."
Jackson said his analysis of credit union pricing showed that while there was evidence of asymmetrical pricing behavior, it was not consistent with profit-maximization.
"For example, credit unions lower the rates on deposits faster when market rates are falling than they raise the rates on deposits when market rates are rising," he wrote. "This results in lower average deposit rates over the interest cycle and, on its own, is consistent with profit maximization."
However, on the loan side, credit unions lower the rates faster when market rates are falling than they raise the rates when market rates are rising, resulting in lower average loan rates over the interest cycle, he said.
"To a large degree, the asymmetrical pricing behavior by credit unions appears to both lower average rates on deposits and lower average rates on loans, implying that credit unions' overall asymmetrical pricing behavior is not consistent with maximizing profits."
That said, Jackson noted the imbalance - this dynamic takes away from the depositors but gives a little bit to the borrowers-suggests that CUs need to pay close attention to their pricing strategies.
"No matter what the intention, the results suggest that there are consequences," he said. "Simply, they need to know exactly what they are doing and why."
In his executive summary, George A. Hofheimer, Chief Research Officer of Filene said the findings will help the CU industry better illustrate its differences.
"All too often credit unions express their differences to policy makers and stakeholders with such important-but ultimately intangible- items as 'great service' and 'co-operative ownership,'" Hofheimer said. "Now, with this study and others by the Filene Research Institute, you can empirically confirm credit unions' pro-consumer behaviors."
