Banks Curtail Lending as Rising Credit Card Delinquencies Loom

According to a report by CNN Money, lending is still down at the nation’s largest banks. There has already been a significant decrease in residential borrowing as banks have tightened credit standards and loan demand has decreased. Residential borrowers are overextended and have found it near impossible to get financing without a very good credit score and significant capital reserves. Loan demand has dropped and the personal savings rate has skyrocketed to 6.9%.

Now that the residential side appears to be stabilizing, commercial real estate is showing weakness. Commercial and industrial lending has seen a precipitous decline as businesses are looking to get leaner and borrow less money.

Lending activity has been curtailed due to lender concerns over economic stability, involuntary unemployment and credit borrowers defaulting on credit agreements. Many consumers who have defaulted on loans during the economic downturn will find it more difficult to borrow in the future due to having an adverse credit rating. Adverse credit means that a consumer is unlikely to be able to gain access to traditional lines of credit for the purpose of debt consolidation, particularly if a tenant or homeowner has little equity.

Banks are lending less and they have a good reason for it. Many economists estimate that banks are only halfway through the losses that they will suffer over the next few years. While most subprime loans and residential loans have already been accounted for, many commercial loans are just starting to show weakness. Many commercial borrowers are looking to refinance loans that have interest rates that are resetting. These borrowers are unable to obtain financing because the value of their commercial properties has dropped below the principal owed on the property. Even M & A activity has seen a severe decline as banks are looking to lend less.

So what is the next shoe to drop? Credit cards. We are just beginning to see weakness in the credit card market. Credit card lenders American Express (AXP) and Capital One (COF) are seeing increased delinquencies. The monthly charge off rate rose to a record high of 10.6% as consumers continue to grapple with the debt problem.

Moody’s expects charge offs to peak at 12% meaning more losses for financial stalwarts such as JP Morgan (JPM), Bank of America (BAC) and Citigroup (C). Many borrowers, who pay their bills on time, have seen their credit terms changed to cover the growing deficit from increasing charge offs. Individuals with good credit have seen their credit limits slashed and interest rates rise.

While the speed of the economic slowdown is declining; the economy cannot heal until unemployment, foreclosures and defaults stop cascading downward.

Comments

[Dave Wrixon:]

With credit card companies, it is not just the bad customers that are a problem. The good ones are the biggest problem because they are paying off their debts. This leaves their loan portfolios looking distinctly risky. Card companies have real issues, the least of which is that have problems distinguishing the good customers from the bad. They have also in some cases squeezed out the good customers in favor of the higher returns offered by the bad ones. How smart was that?

Jun 28 04:22 AM

[apppro:]

In the beginning (sounds like a fairy tale doesn’t it) you praised/enabled all those banks for making housing and TV’s easy to come by for ALL Americans. The American Dream? Then you chastised all those banks for making so many bad or poor quality loans. You even caused many to go under because of your condemnation.

NOW you complain when they pull back on all that loaning and easy credit access!

MAKE UP YOUR FRIGGEN’ MINDS ALREADY!!!

LOL

Jun 28 08:13 AM

[BlueOkie:]

The banks have my money and I don't want them lending it to people who won't pay it back. We are blaming the banks for lending money and feel sorry for those who got the money. Did the banks go door to door and put a gun to people's head? I don't think so. The lending gave a great opportunity to those who were responsible. A few borrowers lost their job thru no fault of their own. That is sad. Time to go get another job and not just wait around drawing unemployment.

Jun 28 08:35 AM

[261133:]

As a German-American I have the advantage of knowing both systems pretty good and can do business on both sides of the pond.
You do better here as an investor, getting better rates, less fees and pay way less taxes. On the other hand as a consumer you do better overseas. Charging different interest rates or fees because of credit score is illegal, called discrimination, hence you either get a loan , mortgage or a credit card or you don't get it , but you never will pay a higher rate etc. because of your risk ( that goes for insurance too). Moreover mortgage rates are lower, I pay 4.3 % and that was years ago when the rates were above 6 % here, now you can get a mortgage below 4 %, but you have to qualify and that is the point. German banks lost bil. on US loans and CDS, but almost never on a mortgage,car or consumer loans.
I just thought some of you find that interesting to know and maybe some of you even agree that being more restrict in the first place but also fair and not discriminating would have saved us a lot of pain.

Jun 28 08:15 PM

[Free Market...:]

Generally agree with what you have to say in your piece but regarding credit cards, it isn't just rising dellinquencies that are causing banks to raise the rates and fees. It's knowing a year from now, care of the just passed credit card legislation (care of Mssrs Frank & Dodd) that banks will be left with no tools to protect themselves when customers show signs of risk. You can look at it from the standpoint that the banks should be able to predict this and it should be priced in the loan when the loan is made. On the other hand, it's a little hard to predict who is about to A) get divorced, B) lose their job in this economy, or C) have a medical emergency any one of which can change their financial picture. Right now, the first 10% you pay of your credit card rate (if you roll a balance) is going to pay for your neighbor who falls into one of the above three categories.

Jun 28 08:40 PM

[FloridaBoy2:]

www.pbs.org/wgbh/pages.../

The link above is worth viewing. It is a history of credit cards. The major problem with the card agreement is that even lawyers cannot understand it.

I agree with the German-American poster. Credit should be granted on the basis of ability to repay.

Jul 02 06:45 AM