Magazine article American Banker

Behind the Credit Concentration

Magazine article American Banker

Behind the Credit Concentration

Article excerpt

Byline: Harry Terris

Revolving consumer debt, mostly comprising credit card loans, fell $110 billion, or 12.7%, from an all-time peak in September 2008, to $866 billion in December 2009, according to seasonally adjusted data from the Federal Reserve.

So how much of the industry's stunning contraction is attributable to the pullback by lenders and belt-tightening among consumers? How much does the unprecedented pace at which uncollectible balances have been evaporating explain the decline?

Perhaps $150 billion of bad credit card debt was charged off in 2008 and 2009, based on loss rates for securitized receivables and measurements of total balances.

That's a bigger number than the net decline in revolving credit, but the story is more complex. Chargeoffs are always heavy on unsecured debt, and new borrowing has historically more than made up for the vanished balances.

One way to isolate the impact of extraordinary levels of bad debt is to hold the annual chargeoff rate at the monthly level that prevailed in January 2008, or 5.48% - which is roughly in line with the average of 5.5% from 1990 through 2007, according to an index maintained by Moody's Investors Service Inc.

Adding back receivables that were lost to chargeoffs above that pace - or about $87 million in February 2008, $2.6 billion in February 2009, $4.4 billion in August 2009 and so on - counteracts the direct impact of record loss rates. …

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