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Pricing Movements and For-Profit Behavior: A Comparison of Banks and Credit Unions

This report examines the differences in deposit rates for credit unions and banks and profit enhancing pricing behaviors from both institutions.

Executive Summary

In this report, we compare the speed of price adjustments at banks and credit unions for loans and deposits, using national averages of monthly data from January 1990 to May 2003. Based on research in other markets we expect profit-maximizing firms to adjust prices upward more quickly than they adjust downward when they have enough market power to have discretion about the timing of the adjustment. This behavior is called pricing asymmetry.

What is the research about?

This research provides a way to test whether banks and credit unions exhibit different behavior because of their organizational structure, in which banks are profit maximizing firms and credit unions are not-for-profit cooperatives. We find that on deposits, banks exhibit asymmetric pricing consistent with profit maximizing behavior, whereas credit unions adjust prices at the same speed whether up or down, consistent with non-profit behavior. We do not observe asymmetric pricing on loan markets at either banks or credit unions.

What are the credit union implications?

There is a significant difference in the pricing patterns of credit unions and banks. Credit union deposit rates are not as responsive, in terms of speed-of-adjustments, to changes in market rates as deposit rated at commercial banks. And, more importantly, credit union deposit rates do not exhibit asymmetric pricing patterns that extract rents from depositors.