Don’t leave home without it

Credit card delinquency figures bring to mind the rock classic “You Ain’t Seen Nothing Yet.” Since last July’s record report – delinquencies jumped to 6.6 percent of all card debt in the first quarter from 5.52 percent – the peak may still be far off.

The sunniest forecast in the Obama administration’s stress test suggested that credit card loss rates for banks would climb to between 12 and 17 percent in total over the next two years. This assumed an unemployment rate averaging just about 8.4 percent over the course of this year. Based on the gloomier scenario of 8.9 percent joblessness, the two-year write-off climbs to 20 percent.

As we race past the government’s worst assumptions, the risks mount that consumer distress will plunge the banks back into crisis. Despite recent rising profits, bankers will need to make sure that their seat belts are fully fastened for the turbulence ahead.

The dismal job market bodes ill for default rates. The US is continuing to haemorrhage jobs at an unexpectedly rapid pace. It would take only another few months of job losses at June’s rate to push unemployment above 10 percent, according to Decision Economics. If June’s payroll loss is sustained – an unlikely but possible outcome – unemployment would climb to 11 percent in less than six months. Credit card issuers may also be dismayed that once Americans lose their jobs they are taking ever longer to find new work. The share of the jobless without work for more than six months is up to almost 30 percent – the highest level since records began in 1948.

While many people can continue to service their debts for a couple of months, half a year of unemployment can cause all but the most prudent saver to default. Benefits replace roughly half of previous wages, according to the Economic Policy Institute in Washington. A report issued recently by Standard & Poor’s indicates that the loss rate on credit cards has risen faster than joblessness over the past six months.

It’s not just the unemployed that will find themselves increasingly stretched. Wage deflation is now a real threat – magnifying the challenge of servicing debt. Weekly earnings fell at an annualised 0.6 percent in the three months to June. This may help explain why an increasing number of Americans are late even in paying their home equity line of credit – usually a priority for those who want to keep their homes.

America’s banks have at least had a little time to buckle up. The Federal Reserve warned the top 19 banks to brace for losses of up to a figure of $600 billion. The more vulnerable have raised extra capital to cushion themselves and with the yield curve so steep even the dullest bankers can produce strong profits.

Even so, at current trends the banks will need all their energy to keep ahead of rising defaults. It is increasingly clear that the bank stress tests were not stressful enough.


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