Many large and public companies have already hoovered up much of the 'emergency liquidity' loans that were supposed to flow to small businesses, leaving small business owners with only one real option to salvage their livelihoods: putting it on the card.
Thanks to the American consumers' insatiable love for debt, credit-card businesses endured boom year after boom year in the aftermath of the last crash, earning healthy margins from clients who like to carry a balance. Naturally, insurers and other large institutions (pension funds etc) bought up the bonds backed by these revenue streams like hotcacks. It was a good business.
However, even during the pre-corona "Before Time", analysts covering those bonds warned that lending standards were growing too lax. In the event of an economic downturn, the bonds could be vulnerable.
Many consumers probably still remember how credit card lenders suddenly reined in credit limits for some riskier borrowers during the depths of the crash and its aftermath, leaving some customers, already scrambling to try and save their homes, with one fewer option.
Are we already seeing a repeat of this behavior?
Bloomberg reports that several major credit-card issuers have acknowledged reining in credit limits on riskier borrowers - some have indicated these might apply to existing customers, while others said only for new applicants - or making other adjustments to try to mitigate the risk of a mountain of balances drifting toward that 90-day-past-due territory like the Titanic toward an iceberg. Some banks even made a habit of stockpiling riskier bonds on their balance sheets in recent years due to shifting customer tastes (though overall, bank balance sheets are much stronger than they were during the runup to the crisis, some weak spots remain).
Discover Financial Services just became the largest lender yet to acknowledge it's begun reining in lines of credit for new customers. In a regulatory filing late Wednesday, the firm said it’s also easing off efforts to sign up consumers and that it expects to take a hit from programs letting existing borrowers skip payments or delay the accrual of interest.
"As the number of loans enrolled in these programs increases, our financial results will be adversely impacted in the short term due to forgone interest," Discover said.
The announcement came a day after Synchrony Financial, the company behind cards for J.C. Penney Co., Gap Inc. and American Eagle Outfitters Inc., said it will try to stem losses by closely managing customers’ accounts. In a conference call with analysts Tuesday, Chief Financial Officer Brian Wenzel said the firm is using its own vast trove of data, as well as information from credit bureaus, to “dynamically reevaluate a customer’s creditworthiness.” That means some may be allowed to spend more, but others less.
The defensive moves are a pivot for both companies, which more often give updates on marketing campaigns and their progress in building up interest-bearing balances. On a conference call with analysts Thursday morning, Discover Chief Executive Officer Roger Hochschild said efforts to curtail risk since the crisis began include conducting additional verification of employment and setting lower limits for new accounts, while offering fewer increases to existing cardholders.
"As part of our credit response to Covid-19, we haven't made any changes in terms of closing inactive accounts or doing more line decreases,” Hochschild said in a separate interview Thursday. "We think it’s very challenging to do those now. Pulling away credit when they need it most can have tremendously adverse impacts."
Angela Merkel made the point earlier that the coronavirus crisis is only just beginning. In all likelihood, we will be living with the virus, and its economic consequences, for a long time.
Americans might need to start getting used to the idea of living within their means - or at least closer to it. Unfortunately, for many, there aren't any obvious alternatives.