More credit woes ahead for banks
It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
The unemployment rate has long mirrored banks' loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, "Not unless I win the lottery."
In the meantime, he said, "I'm just doing what I can."
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested the nation's 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a worst-case economic situation.
But if unemployment breaches a 10 percent peak, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capitol One Financial, one-fifth of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup, and JPMorgan Chase, about a quarter of card loans are expected to sour.
Even the government's grim projections may vastly understate the size of the banks' credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the biggest banks could reach $141.5 billion by 2010 if the regulators' loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element included in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. And on Friday, the unemployment rate reached 8.9 percent as the economy lost 539,000 jobs.
This week, the Senate takes up the Credit Cardholders Bill of Rights, which passed the House 357-70. President Obama over the weekend pressed lawmakers to let him sign the bill by Memorial Day.
It would curb the ability of card issuers to raise interest rates retroactively and restrict hidden fees and penalties.
