Credit Union Rate and Earnings Retention Decisions under Uncertainty and Taxation

This paper presents a model of credit union loan and deposit rate setting when net income flows are uncertain and subj ect to taxation. Optimal rates are chosen to maximize the expected va lue of a performance measure based on a comparison of the credit unio n's rates to alternative rates, subject to a probabilistic constraint on the net change in capital reserves relative to a capital adequacy standard. Taxation will alter the end-of-period trade-off between th e change in capital reserves and the immediate distribution of surplu s, and would likely affect credit unions in a nonuniform manner and p erhaps be regressive in nature.