Filene Report Probes Influences on Loan Pricing at CUs, Banks

MADISON, Wis. – The fact that credit unions’ pricing behavior differs from banks’ is nothing new. But what factors influence credit union and bank loan pricing? A new report sponsored by the Filene Research Institute examines some of the issues and factors that affect how financials price their loan products. Among some of the influences considered in the report “Key Influences on Loan Pricing at Credit Unions and Banks” written by Robert Feinberg, a professor of economics at American University, Washington, D.C. are competition in local consumer markets and internal variables. The report also looks at how regulatory policy supports credit unions in carrying out their service mission with respect to loan pricing. According to the report’s Executive Summary, the study which uses data from a Federal Reserve survey of bank loan rates on new vehicle and unsecured loans, is one of the first to model how internal variable, specific to an institution, affect its pricing behavior. Feinberg also used call report data for banks and credit unions, and market share data from Sheshunoff Information Services. Some of the key findings of the study were expected such as: * because of their different ownership, governance structure, and objectives, credit unions’ pricing behavior differs “notably” from that of banks; * banks exhibit pricing behavior “consistent with profit maximizing behavior.” For example, new vehicle loan prices are higher at larger banks in less competitive markets, and among banks that are members of top 10 bank holding companies. * Credit unions do not raise their rates in less competitive markets, “a behavior that is consistent with their overall objectives.” * For unsecured (non-credit card) loans, measures of market competitiveness affect bank pricing but not credit union pricing, and CU rates adjust to changing conditions even slower than the already slow adjustment speed of bank rates. There were, of course, some unexpected findings of the study: * proxies for ease of expansion of credit unions in a state indicate that relative ease reduces new vehicle loan rates at individual banks and credit unions; * new vehicle loan prices are lower at larger credit unions; * internal variables at credit unions can influence their loan rates for new vehicles. Feinberg concludes that the evidence he studied 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.” He continued to state that, “Our results suggest a second objective: Regulatory policy should also avoid requiring capital standards so high relative to risk that they distort pricing decision, thereby undermining the purpose of credit unions which is to meet social and service objectives rather than to maximize profits.” -