Report Examines What Drives CU Pricing Decisions

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What affect on loan and deposit pricing does a credit union have on a market?

A new study from the Filene Research Institute seeks to quantify that effect, along with answering other questions, such as how does competition in local consumer markets affect bank and credit union loan pricing, how do internal variables affect credit union loan pricing, and how can regulatory policy support credit unions in carrying out their service mission with respect to loan pricing?

The research, conducted by Robert M. Feinberg of American University, finds that the different ownership, governance structure and objectives of credit unions and banks result in different pricing behaviors. "For unsecured loans, market competition affects bank pricing but not credit union pricing, and credit union rates adjust to changing conditions more slowly than do bank rates," the study states. "But compared to new vehicle loan rates, unsecured loan rates are slow to change for both types of institutions."

Feinberg's study, Key Influences on Loan Pricing at Credit Unions and Banks, uses a model that explains average prices of banks in local markets, including prior research on how the presence of credit unions influences average prices. From this model of average prices, Feinberg developed a model that explains prices at individual banks, and extends the analysis to a model that explains prices at individual credit unions.

Data for developing these models was drawn from a Federal Reserve survey of bank loan rates on two types of loans, new vehicle loans and unsecured loans. Feinberg also used call report data for banks and credit unions, and market share data from Sheshunoff Information Services, an affiliate of The Credit Union Journal.

Not surprisingly to credit unions, the research also reveals that bank loan pricing is consistent with profit maximizing. New vehicle loan prices are higher at larger banks, in less competitive markets, and among top 10 bank holding company outlets.

In states where credit unions are allowed to expand with fewer regulatory hurdles, new vehicle loan rates tend to be lower. Among credit unions, new vehicle loan prices are lower at larger institutions. Also, credit unions do not raise their rates in less competitive markets, a behavior that is consistent with their overall service objectives.

"Internal variables at credit unions can influence loan rates for new vehicles," noted Feinberg. "In particular, capital-constrained credit unions are less able to offer attractive rates to members. Of the four internal variables that reflect possible effects of capital constraints, three are statistically significant."

"Capital-constrained credit unions appear to charge higher loan rates on both new vehicle loans and unsecured loans," says Bob Hoel, Executive Director, Filene Research Institute. "This suggests that the regulation of capital for credit unions should not only assure enough capital to maintain safety and soundness, but also avoid requiring capital standards so high that they obstruct the purpose of credit unions. That purpose is to serve social and service objectives, rather than to maximize profits."

"Previous Filene research studies show that government-imposed capital requirements for credit unions are too high," added Hoel. "This new research supports those earlier conclusions."

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