ARE CREDIT UNIONS JUST SMALL BANKS? DETERMINANTS OF LOAN RATES IN LOCAL CONSUMER LENDING MARKETS

Abstract

Only recently have studies of banking markets paid attention to the potential competitive discipline provided by credit unions on consumer loan rates. However, an unresolved issue is the extent to which credit unions are substitutable for banks. We analyze a combined sample of 100 banks and 187 credit union in 68 U.S. markets observed quarterly over the 1992-1998 period, to explain loan rates for two types of consumer loans. Our results suggest that, even after controlling for market shares and deposit sizes of institutions, credit unions charge their members significantly lower interest rates on loans than do banks. Furthermore, an examination of the pattern of responses to lagged interest rates yields an indication of greater inertia in rate-setting by credit unions than by banks.

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