Dec 06 2006

A Comparison of the Deposit and Loan Pricing Behavior of Credit Unions and Commercial Banks

Do banks and credit unions price their loans similarly, or are there significant differences among financial institutions? Dr. William E. Jackson, Financial Economist and Financial Policy Advisor at the Federal Reserve Bank of Atlanta and Filene Fellow reports his findings in the study, A Comparison of the Deposit and Loan Pricing Behavior of Credit Unions and Commercial Banks.

This research examines pricing data on a more granular level in terms of both markets and types of deposit and loan products, comparing credit union and bank pricing data on several different types of deposit and loan products in the U.S. as a whole and in nine specific markets from California to Massachusetts.

Jackson concludes that “something funky is going on with credit union pricing,” indicating that his analysis revealed something unexpected. He finds that credit unions differ from commercial banks in how they set deposit and loan rates over the interest rate cycle, and the difference appears to be linked to the profit orientation of the players. The study reaches several related conclusions.

  • Credit unions and commercial banks exhibit similar asymmetric patterns in the pricing of their deposits. Both tend to lower rates on deposits in response to a decrease in market interest rates much faster than they raise rates in response to an increase. This asymmetry leads to lower overall interest expense over the interest rate cycle given standard assumptions about the price elasticity of deposit supply.
  • Commercial banks exhibit no statistically significant asymmetry in their loan rate-setting patterns.
  • Credit unions do exhibit statistically significant asymmetry in their loan rate-setting patterns, tending to lower their loan rates faster when the market is falling than they raise rates on loans when market rates are rising.
  • Commercial banks combine asymmetric pricing of deposits and symmetric pricing of loans in a way that is consistent with a profit maximization objective. Credit unions, however, combine asymmetric pricing of deposits and asymmetric pricing of loans in a way that is consistent with a strategy of maintaining constant margins between average deposit rates and average loan rates.
  • Credit unions exhibit a pricing asymmetry that lowers the interest expense associated with deposits but also lowers the interest revenue associated with loans over the interest rate cycle.

The Jackson research empirically confirms credit union pro-consumer behaviors. In addition to its public policy implications, the research allows credit union executives to examine the pricing behaviors of commercial banks.