Credit Card Delinquencies Spike Past Financial-Crisis Peak

Authored by Wolf Richter via WolfStreet.com,

Subprime is calling...

In the first quarter, the delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the 4,788 smaller banks in the US – spiked in to 5.9%. This exceeds the peak during the Financial Crisis. The credit-card charge-off rate at these banks spiked to 8%. This is approaching the peak during the Financial Crisis.

A sobering set of numbers the Federal Reserve Board of Governors releasedthis afternoon.

But overall, across all commercial banks, including the largest banks with the largest credit-card loan balances outstanding, the delinquency rate was 2.54% (not seasonally adjusted). This overall rate was pushed down by the largest 100 banks, whose combined delinquency rate in Q1 was 2.48%.

These large banks have been offering appealing incentives to consumers for years, and they’ve been going after consumers with the higher credit ratings, and they’ve been following good underwriting practices – having not yet forgotten the lesson from the last debacle – and this conservative approach is now helping to keep losses down.

But the thousands of smaller banks couldn’t compete with those offers, and so they got deeply into subprime cloaked in sloppy underwriting. This way, they were able to reel in new credit-card customers that the big banks didn’t want, and those customers needed the money and charged up their new cards in no time, and the interest rates of 25% or 30% looked good on the banks’ income statement and helped maximize executive bonuses, yes even at smaller banks.

But turns out, those banks had reeled in the most fragile customers and had eagerly doused them in irresponsible levels of debt at usurious interest rates – and now what? These customers won’t ever be able to pay off the balances or even pay the interest. For many of them, there’s only one way out. This caused the delinquency rate to spike from 3.81% to 5.90% in just three quarters.

This chart shows delinquency rates for the largest 100 banks (blue line) and for the remaining 4,788 banks (red line):

Credit card balances are deemed “delinquent” when they’re 30 days or more past due. The rate is figured as a percent of total credit card balances. In other words, among the smaller banks, nearly 6% of the outstanding credit card balances are now delinquent.

The bank tries to collect these delinquent loans, and some customers are able to catch up. Others are not. After recovering what it could, the bank moves the remaining delinquent balance out of the delinquency basket and into the charge-off basket. This is when the loan is “charged off” against loan loss reserves.

These charge-offs among the largest 100 banks rose to 3.73% in Q1 (not seasonally adjusted), the highest since the first quarter 2013.

But among the remaining 4,788 banks, the charge-off rate spiked to 7.99%, the highest since Q2 2010. The rate among smaller banks had peaked during the Financial Crisis in Q4 2009 at 8.78%:

Both charts show that the largest 100 banks had suffered massive losses during the Financial Crisis as their credit card loans blew up, and as consumers, many of whom had lost their jobs, could no longer keep up with their credit card debts.

The smaller banks had been more conservative leading up to the Financial Crisis, and their delinquency and charge-off rates had been somewhat less catastrophic.

The difference between then and now is that back then, unemployment was heading toward 10% and millions of people had lost their jobs; now the unemployment rate is near historic lows and the economy is humming. Yet already the smaller banks are booking these losses on their credit card portfolios. What will they do when the economy ever slows down?

That was a rhetorical question.

In the overall scheme of things, these 4,788 smaller banks hold only a small portion of all banking assets, including credit card balances. Of the $1 trillion in credit debt outstanding, these small banks hold only a fraction. So they won’t jeopardize the US financial system. And that’s why the Fed, as banking regulator, is relatively sanguine about these dizzying charge-off rates at the smaller banks.

But the surge in charge-offs at these banks points at something fundamental: Credit problems at the margin. The consumer spending binge in recent years has been funded not by surging incomes at the lower 60% of the wage scale, where real wage stagnation has reigned, but by borrowing – particularly via credit cards and auto loans. Both of them have turned sour at the margins. And these are still the best of times.

Only about half of retail is under attack from e-commerce, but that half is getting crushed. Read… Brick & Mortar Meltdown Pummels These Stores the Most 
 

Comments

DownWithYogaPants revolla Sun, 05/20/2018 - 00:18 Permalink

The debt based money system is engineered so that even if you get out of debt then the debt is only smeared over to other individuals in the debt money system.

I take your point that getting out of debt is good.  I have never even owned a new car. All of them have been used.   I have never been in debt.  So I completely agree.  I just want to highlight that we run on a debt based money system under a private central bank that appears to just love pimping out the desperate.   

Imagine how much better the world would be if we did not run on a debt based money system.  I can dream can't I?

In reply to by revolla

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In reply to by WorkingClassMan

swmnguy IDrankWhat Sun, 05/20/2018 - 12:39 Permalink

It's intellectual laziness, and fatal to critical thinking and conversation.  Like all forms of bigotry.  It's an excuse to stop pursuing root causes and their effects.  When I hear "The Jews" as an explanation for anything, I never hear Why The Jews.  No analysis.  It all stops when we find, or think we find, a Jew.

Never mind that Jewishness is used to describe religion, culture, race, ethnicity, nationality, and that it's an incredibly elastic term.  Most of the Israeli far-right is actually Russian, for instance, and understanding them as Russians makes a lot more sense than understanding them as Jewish or Israeli.

It's a good indicator in conversation, though.  When you run across somebody who has found a handy one-size-fits-all Unified Field Theory That Explains Everything, you know you either need to get out of conversation or you need to be willing to have your time wasted. To far too many ZH'ers, The Jews are King Charles' Head in Dickens' "David Copperfield."

In reply to by IDrankWhat

IDrankWhat swmnguy Sun, 05/20/2018 - 14:43 Permalink

At the risk of cluttering the message board with a personal response (the only alternative is no response); Thank you for an interesting and informative post.  The content could all be bullshit, of course; and the "The Jews" could actually be responsible for the Pandora's Box of human tragedy since the beginning of time.  [edit: It's fair to say they are likely responsible for some] At any rate please accept the complementary dose of dopamine via the up-vote click.

In reply to by swmnguy

bigloser Putrid_Scum Sun, 05/20/2018 - 07:33 Permalink

I've read a bunch of what you've written online and think you're full of shit.

The world isn't ending and though the likelihood of a major financial crisis is still strong, they happen all the time and people adjust.

Only the truly stupid or weak get caught up in the net of disaster you preach.

STFU about gold and silver. I've owned both for many years and still nobody takes them as collateral. Plus, their value continues to decline or go sideways at best. Instead of PMs, most people would be better off investing in their own business or a reliable second vehicle.

You are Putrid Scum and you should stop spamming this site to sell your little book of bullshit.

In reply to by Putrid_Scum

TechnoCaveman Putrid_Scum Sun, 05/20/2018 - 12:06 Permalink

  Silver is suppose to be the way to go. 
  It will rise in value faster, for it is undervalued now. 
  Also if gold goes to $2k an ounce, how does one pay for $50 worth of goods ? 
  
  Major disasters have happened in the past, trust me I have seen them. 
  Also, one should be prepared to wait out a storm or disaster in comfort, not carnage. Its a choice everyone has but few make (as they go watch Mad Max or some other disaster movie)

In reply to by Putrid_Scum

TechnoCaveman gigadeath Sun, 05/20/2018 - 12:02 Permalink

 I know CASH has been demonized but it works and helps ensure privacy. No tracking or harvesting purchase history. No identity theft or credit card theft. 
 Debt is only needed to buy what one can not save enough for. 

 Debt's treadmill of payments lowers production and GDP. I buy my $15 headphones on credit card. Pay back $25 and never buy that  $9 song pack because $10 extra went to credit card payments. 

  Now with online banking, debt processing is not keeping bank employees employed either. 
  Economies built on debt are unsustainable. Be it cars, homes or credit cards. 

   Can anyone else see the lesson ? 

 

In reply to by gigadeath

Davidduke2000 Drop-Hammer Sun, 05/20/2018 - 07:01 Permalink

I do not like joos but they have nothing to do with people living off their credit cards.

It is the us propaganda that makes things looking rosy and people live off their credit cards hoping they will be part of that rosy scenario and great economy, but in reality inflation is soaring, unemployment is at 25% at a minimum if we count like in the good old days and do not leave 95 million people out of the labor force.

In reply to by Drop-Hammer

Jim in MN Sat, 05/19/2018 - 20:02 Permalink

Well Hell all the essentials keep going up in price, and Baby wants her Christmas presents like usual, whaddya gonna do?

CHARGE IT AND PRAY IN THE US OF A

MoralsAreEssential Jim in MN Sun, 05/20/2018 - 12:49 Permalink

That's the essence of the issue.  Do you think you're going to socially fit in if you can't BUY superficially the "lifestyle" looks?  Do you think the kids who can't afford the uber expensive athletic equipment, travel to sports games and paying for after game food, etc., for their little superstars are going to learn the "proper" sort of social cooperation which is the ENTIRE GAME TODAY.  As for the 2 earner families with 3 jobs, there are still essentials which have to be bought like healthcare, food isn't going down and are you teens really going to not have a smart phone?  How much are you paying for your phone package?  It's a RIGGED SYSTEM and that is purposefully done.

In reply to by Jim in MN

evokanivo Sat, 05/19/2018 - 20:03 Permalink

As discussed in the article and WolfStreet comments section, this is restricted to smaller banks and even they are still profitable at these cardholder charge-off rates because the non-delinquent customers are being charged 20+% APR. So this should not be misconstrued as a precipitating event for the next financial crisis - at best it could be a coincident indicator.

gm_general Sat, 05/19/2018 - 20:34 Permalink

"The difference between then and now is that back then, unemployment was heading toward 10% and millions of people had lost their jobs; now the unemployment rate is near historic lows and the economy is humming."

Wrong - the real unemployment in the crisis was about 22% and its remained basically at that level since. And the real yearly GDP change since the "recovery" has ranged between -1% and -2%.