MARKET CURRENTS
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- Monday, November 17, 2008, 4:39 PM Banks are closing millions of credit-card accounts and cutting credit lines in an effort to inoculate themselves from a tsunami of defaults that could rival the subprime crisis. Too bad they're late to the party, again.
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Watch what happens to the default rates when unemployment hits 10+%.
Whats more, most credit card companies failed to price in the consequences of default rates being triggered on many / or all of a holder's accounts simultaneously, at which point, what was a manageable problem (e.g. 15-19% interest) becomes an unmanageable one at 30+% interest.
If the cards are close to the limit, the credit line is quickly exhausted, and the whole thing blows up, leading to predictable outcomes of default.
From a systems perspective, once these issues arise on a significant number of cards, the default rate can spike very quickly.