Aug 12 2009

A Comparison of Bank and Credit Union Pricing

Report  
Number  
192

This study compares bank and credit union pricing models to determine where consumer would benefit most on deposit and loan rates.

Steve Swidler, PhD
J. Stanley Mackin Professor of Finance
Auburn University
Report Number 192

Executive Summary

U.S. credit unions famously have a long-running federal tax exemption on their corporate-level earnings, but a lesser-known tax benefit also exists for banks. Banks may incorporate as a Subchapter S (Sub-S) corporation, which eliminates federal taxes on corporate level earnings. Sub-S shareholders (limited to 100) pay personal income taxes on a pass-through basis based on the bank’s earnings. The other corporate status option for banks is the C corporation, which is subject to normal corporate-level earnings taxation and has no limit on the number of shareholders. The popularity of the Sub-S bank incorporation option has increased dramatically since this status became an option for banks in 1996. Today nearly one-third of all banks are incorporated as Sub-S corporations.

What is the research about?

This research project examines whether a financial institution’s type (C corporation bank, Sub-S bank, or credit union) affects the deposit and loan rates offered to its customers. Specifically, we are curious to know whether the tax benefits conferred upon Sub-S banks and credit unions are shared with financial services consumers, either through higher deposit rates or lower loan rates.

What are the credit union implications?

Sub-S banks are profit-oriented organizations with shareholders (albeit limited numbers of them) who demand good returns on their investments. Credit unions, on the other hand, are given a tax benefit but for a very different purpose. Credit unions have a special mission to serve the needs of everyday people, not profit-oriented investors. As this study points out, the public benefits from this, in part, through lower loan rates and higher deposit rates. Policymakers should find this study useful in assessing the efficacy of both the Sub-S and credit union tax exemptions.