CUNA Disputes Rate Analysis

In a March 8 Viewpoint ["Credit Unions Face Tough Test"], Peter Duffy suggests that despite overwhelming evidence from rate-tracking services such as Datatrac, banks actually pay higher interest rates to depositors than credit unions do, and the reason is the higher deposit insurance costs credit unions incur. This analysis is quite misleading.

First, Mr. Duffy claims that stated or posted rates on loans and deposits are often not the rates actually agreed to, that depositors and borrowers can offer negotiate better terms. Financial institutions certainly do match competitive offers, but Mr. Duffy's analysis would require that banks offer better than posted rates significantly more frequently than credit unions do. That is doubtful.

Second, Mr. Duffy compares the average cost of deposits at banks and credit unions over the past 15 years and "finds" that the average cost at banks is higher than at credit unions, from which he infers that banks pay higher rates on consumer deposits. Actually, to reach this result, he excludes direct deposit accounts from the denominator for banks, boosting the average yield while leaving in the almost equivalent "share drafts" for credit unions. Credit unions typically pay interest on share drafts, but at much lower rates than on other types of deposits.

Third, Mr. Duffy's analysis is mixed up because of the very different mixes of credit union and bank deposits. Credit union deposits are virtually all retail. Almost nonexistent on credit union balance sheets are large, negotiable certificates of deposit and brokered deposits, both of which tend to pay much higher rates than consumer deposits. In the $100 million to $40 billion size range that Mr. Duffy considers, banks are much larger than credit unions. Fully 30% of bank assets in this group are in banks with over $10 billion in assets. These larger institutions are most likely to rely on more expensive wholesale funding, driving up their average cost of deposits. Only 5% of credit union assets in the group are in credit unions of that size. So the average cost of credit union deposits represents rates paid to consumers while the average cost on bank deposits is driven by a mixture of consumer and wholesale rates.

Therefore, there is no reason to doubt the basic reality revealed by rate-tracking firms: credit union rates and fees are more consumer-friendly than at banks.

On the issue of federal deposit insurance, over the recent financial crisis the National Credit Union Share Insurance Fund has fared much better than the Federal Deposit Insurance Corp. So far, credit union insurance premiums have been quite a bit lower than at banks, and over the next decade, even after the FDIC's latest assessment changes that favor smaller banks, insurance costs to credit unions and community banks will be similar to each other.