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The Effect of Credit Unions on Market Rates for Unsecured Consumer Loans

This report examines the impact of credit unions on competitive performance in local lending markets.

Executive Summary

As banks continue the rush to consolidation which has eliminated large numbers of competitors from the marketplace, concerns have arisen about the competitive effect this may have. In particular, with greater market shares in local markets, will banks be able to raise loan rates to the disadvantage of consumers without the opportunity for home equity financing? Economists know that sufficient numbers of small firms can provide a threat to dominant providers and promote more competitive performance. However, the effect of credit union presence on bank loan rates has never been tested. The issue is relevant to how state and federal banking and antitrust authorities evaluate mergers in the industry.

What is this research about?

This study examines the pricing of personal, noncredit card loan rates in up to 90 small U.S. markets. Credit unions in each of these markets are small competitors, with total credit union share of market ranging from 0% to 31% of deposits, with an average share of 9%. This research focused on the pricing impacts of market shares of dominant banks/thrifts and the market share and potential for expansion of credit unions.

What are the credit union implications? 

This reports findings support the notion that consumers would benefit from the following public policy actions relating to the financial services industry:

  • Reduction of barriers to entry and the encouragement of expansion of small lenders, including credit unions.
  • Anti-trust remedies for bank and thrift mergers if there is an absence of a strong presence of small financial institutions such as credit unions.