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Credit Unions and the People’s Money: Estimating the Benefits of Allowing Credit Unions to Accept Public Deposits

Public entities have an obligation to handle their funds wisely, and this research shows why credit unions should be allowed to accept public deposits. There are many differences in state laws, and the report takes a national look at the consequences.

  • Luis Dopico Economist
  • William E. Jackson III Smith Foundation Endowed Chair of Business Integrity, Culverhouse College of Business at University of Alabama

Executive Summary

Consider a dilemma: You are shopping for a new car and find two identical vehicles at dealerships across town from each other. The prices are different at East Auto than they are at West Auto, and so are the service, amenities, and convenience. You wouldn’t mind buying at either place, but you’re sold on West Auto’s prices and eagerness to meet your needs. But once you get down to brass tacks, the sales manager shakes his head and sends you reluctantly to the competition at East.

Welcome to the world of public deposits, where a hodgepodge of state laws and regulations puts many city managers and county treasurers in a similar bind every day. Those that seek a credit union—perhaps they want their money to be loaned out locally, or they desire a more convenient branch, or maybe they simply prefer the service—may be forced to do business elsewhere. The deposit products are no different, but the deposits trends are, since laws, regulations, and practices in many states restrict the ability of many public entities to deposit funds in credit unions, and of credit unions to accept those funds.

What is the Research About?

Public deposits in commercial banks ($433 billion, 5% of commercial bank deposits) far outweigh those in credit unions ($1.5B, 0.2% of credit union deposits). Filene seeks to build on local and state-level analyses of this public deposits discrepancy by taking a national look at the consequences of the state-level confusion. The authors review the state statutes, report on interviews with credit union stakeholders, and finally provide a national and state-by-state analysis of the advantages public entities could reap if they were uniformly allowed to use credit unions as depositories.

What Are the Credit Union Implications?

It's good policy to allow credit unions to accept public deposits, because it increases choice in the marketplace, provides greater competition, and in many cases provides better convenience for trustees of the public’s money. And the benefits of allowing public entities to deposit funds in credit unions go beyond better interest rates. For instance, there are many very small communities in the United States without a commercial bank but where a credit union is present. Since many of these communities are also low-income areas with special economic challenges, much of the cost of the inefficient public policy of restricting credit unions from participating in the public deposit market falls on those least able to afford it.