Executive Summary
How does the competitiveness of local markets for consumer loans affect bank and credit union pricing of these loans? How do bank and credit union behaviors differ in this respect? How do internal variables affect credit union loan pricing? How can regulatory policy support or inhibit credit unions in carrying out their service and social missions with regard to loan pricing? These are the questions we address in this study. Their answers have important implications for credit unions and their regulators, in particular, with regard to capital requirements.
What is the research about?
We begin with a model that explains average prices of banks in local markets, for which the literature provides considerable precedent. This includes some prior research on how the presence of credit unions influences the average price in local markets. From this model of average prices, we move to a model that explains prices at individual banks, for which a few precedents exist. We then extend the analysis to a model that explains prices at individual credit unions, for which no precedents exist. This approach allows us to confirm elements of these models which existed in the literature as well as to extend these models in new ways to answer our research questions. The source of data for developing these models includes a Federal Reserve survey of bank loan rates on two types of loans, new vehicle loans and unsecured (non-credit card) loans.
What are the credit union implications?
The evidence indicates that internal as well as external variables influence loan rates. Capital-constrained credit unions appear to charge higher loan rates on both new vehicle loans and unsecured loans. This suggests that the regulation of capital for credit unions has two important objectives. The traditional objective is to assure enough capital to maintain safety and soundness. Our results suggest a second objective: Regulatory policy should also avoid requiring capital standards so high relative to risk that they distort pricing decisions, thereby undermining the purpose of credit unions which is to meet social and service objectives rather than to maximize profits.