Two weeks after we first brought the market's attention to the crisis quietly unfolding in consumer debt, The Wall Street Journal has caught up, admitting that some say is a sign of the financial fragility of middle-and-lower-income consumers.
As we detailed previously, the Federal Reserve reported most recently that US consumer non-mortgage debt has never been higher: as of December 31, 2017, US households had a record $1.0 trillion of credit card/revolving loans, a record $1.3 trillion of auto loans, and a record $1.5 trillion of student loans.
Among these, credit card and auto loans, in particular, have been experiencing accelerating delinquencies, but the very gradual increase in aggregated Net Charg-Offs has allayed any economist concerns about the state of the US consumer.
But, a modest scratch below the surface, and a startling discovery emerges.
While the larger U.S. banks that dominate credit card issuance have focused on prime and super prime consumers post the Great Financial Crisis (GFC), and have enjoyed a prolonged period of low charge off rates concurrent with the Fed’s almost decade long ZIRP.
As TCW's Chet Melhotra notes, it is America's smaller banks - those not in the Top 100 by asset size - that have experienced in just the recent months a surge in charge off deterioration, which at 7.9% is on par with the last financial crisis! In other words, to find where the next consumer credit crisis hides - and will erupt next - ignore the big banks and focus on the smaller ones.
And delinquency rates are just as dangerously divided.
And now The Wall Street Journal has noticed this could be a problem...
Both large and small banks pushed into the credit-card market in the wake of the recession in search of higher yields and an affluent customer base.
As competition intensified, big banks splurged on customers with cash rewards and points that could be redeemed for vacations.
Some smaller banks battled back by loosening credit-score requirements, but that strategy now seems to be backfiring, even though the economy is improving and the unemployment rate is near record lows.
Wages are rising only slowly and some consumers have simply taken on more debt than they can handle.
“There’s almost been a panic in getting their product out there to subprime borrowers,” said John Heath, directing attorney at Lexington Law, a consumer law firm based in Salt Lake City specializing in credit repair.
Some clients struggling to pay back credit-card bills to small banks were earlier rejected by large ones, he added.
And, as the chart above show, the deterioration at small banks has raised some concerns about how much worse losses could get if the economic recovery falters.
The small banks’ experience is “simply a leading indicator of a downturn to come,” said Robert Hammer, founder and chief executive of credit-card industry consultant R.K. Hammer.
In the run-up to the last recession, he noted, losses accelerated for small banks before they did for big ones.
But, but, but... all that dis-saving (and credit-card-debt engorgement) has spiked consumer confidence to near record highs...
Which has never ended well!