Jan 01 2003

Key Influences on Loan Pricing at Credit Unions and Banks

In this study we investigate the determinants of loan pricing at individual banks and credit unions.

In earlier research, we investigated determinants of average rates on consumer loans in local markets. In this study we investigate the determinants of loan pricing at individual banks and credit unions. The study includes two types of loans: new vehicle loans and unsecured (non-credit card) loans. We find that credit unions and banks differ substantially in their pricing behavior. On new vehicle rates three variables are positively associated with higher rates at individual banks: (1) size of the bank, (2) market concentration (where a small number of non-credit union institutions dominate a market), and (3) belonging to a top ten bank holding company.

By contrast, larger credit unions charge lower rates, and their pricing is unaffected by market concentration. Greater ease of expansion for credit unions in a state lowers loan rates for both banks and credit unions in that state. Unsecured (non credit card) loans appear less sensitive to market conditions, and rates are slower to adjust. Internal variables associated with possible capital constraints on credit unions are associated with higher loan rates on new autos. This suggests that regulations creating capital requirements beyond the needs of safety and soundness could interfere with the service goals and social mission of credit unions.