Consumer credit card and other debts are showing distress after years of easy money chasing risky profits like the subprime housing bubble.
Consumer credit card delinquency and charge-offs rocketed to seven year highs in the third quarter. At the top 100 U.S. banks, third quarter charge-offs are at levels unseen since 2013.
Credit card delinquency occurs when a payment is past due for 30 days or more. A credit card charge-off occurs after 180 days of non-payment. That’s when the issuer marks a charge-off on the borrower’s credit history and can sell the debt to a collections agency.
Meanwhile the top four credit card issuers (Chase, Citibank, Capital One and Bank of America) shored up loan loss reserves by 9.9%. Each of the Top 4 has set aside over half a billion additional dollars in reserve.
That’s troubling news as Wall Street bulls pin their hopes on the American consumer to keep the record-long economic expansion going.
It’s not only the consumer credit card market showing cracks.
According to the Federal Reserve Bank of New York, auto loan delinquencies set an eight year record high in Q2 this year.
Meanwhile, foreclosures in the U.S. housing market shot up 13% in October.
The Federal Reserve’s low interest rate environment is fueling the consumer credit bubble in two ways.
First, it makes banking less profitable and unattractive to investors. That incentivizes banks to push riskier, but more profitable, high interest rate products like consumer credit cards.
Secondly, it floods banks with money to lend out for these riskier investments. This has created another bubble in equities along with consumer credit, as the flood of easy money chases quick profits.
The volume of subprime and deep subprime credit card originations tracked by the US Consumer Finance Bureau over the last decade is staggering.
And Wall Street is back to its old, pre-recession ways, bundling risky investments into asset backed securities and selling the securitized consumer debts to each other for massive profits.
Last year there were 70 such deals globally, with $44 billion and 70 bundles of securitized credit card debts changing hands. At the end of September 2019, consumer credit backed securities totaled $4.1 billion.
And it’s not just consumer debt that’s buckling under the weight of over leveraged credit. The charge-off rate on commercial and industrial loans for all U.S. commercial banks spiked 23% in Q3.
In May, Fed Chair Jerome Powell warned of a “moderate” risk that business debt at “historic highs” could spill over into the rest of the economy and trigger another financial crisis.
In June, the New York Times reported on how an unregulated “shadow banking” industry, backed in part by Wall Street, is fueling risky loans to businesses. Lawmakers and regulators can’t keep up with all the gray areas, or stop the flood of liquidity from flowing into them.
Mark Twain is often attributed with the quip:
History doesn’t repeat itself, but it does rhyme.
The next recession triggering event is unlikely to start in the housing loan market again. We’re already once burnt, twice shy in housing loans. A bubble bursting in a different sector rife with risk and greed is more likely to ripple through the economy next. The consumer credit market is one to watch.
Last modified: September 23, 2020 1:21 PM