While some may see the burgeoning of consumer loan delinquencies as a looming problem for the industry, regulators say banks are well-prepared to handle the situation.
The banking agencies admit they are watching very closely the increased delinquency rates and a similar rise in personal bankruptcies. But they unanimously say they're confident that tightened underwriting standards, low default and chargeoff rates in nonconsumer loans, high profit margins, and large capital reserves will prevent or offset losses from bad loans.
"When I think of the implications this has for banks, I put it in the context of an extraordinarily healthy industry," said Federal Reserve Board Governor Janet L. Yellen, "so I do not see this posing a threat. But are we concerned? Yes. We are tracking this very carefully."
Regulators have been focusing on banks' revolving credit portfolios, where the rise in delinquencies and chargeoffs has been most marked.
From June 1995 through June 1996, credit card issuers saw a 50% jump in losses. In addition, 5.73% of all credit card debt was delinquent at midyear, compared with 3.9% the year before.
"We're not seeing anywhere near the same level of problems in any of the other consumer lending categories" as we are in credit cards, said Federal Deposit Insurance Corp. Chairman Ricki Helfer.
However, regulators are quick to point out that credit card banks are pulling in much higher average returns on assets than other insured institutions.
"Credit card banks have had consistently high profitability," said Comptroller of the Currency Eugene A. Ludwig. "These banks have been able to price their products to incorporate expected losses."
The losses stemming from revolving credit lines will at worst put a dent in institutions' bottom lines, said Ms. Yellen, chairman of the Fed's economic affairs committee. "The worst you are likely to see is some negative surprises - some earnings that are a little lower than banks might like," she said.
In addition, credit card banks are tightening their approval standards and reducing their high-volume direct mail solicitations.
"These banks are taking a close look at the number of credit cards they are sending out," Ms. Helfer said. "The regulators are certainly staying on top of this, but most of the credit card banks were on top of it just as quickly."
State regulators echoed their federal counterparts' belief that credit card banks are taking prudent steps to fend off any further rise in delinquencies or chargeoffs.
Utah Commissioner of Financial Institutions G. Edward Leary said the 14 state-chartered credit card companies he supervises have already managed to reverse an uptick in delinquencies reported at the end of the first quarter. At March 31, the banks reported, 5% of their credit card loans were past due. But by midyear, delinquencies had dropped to about 4%.
"They have really turned around and responded," Mr. Leary said. "Their preapproval parameters were tightened; they cut back credit lines and made stronger and quicker efforts to collect."
A related trend that is catching the attention of regulators is the rise in personal bankruptcies. Bankruptcy filings hit the one million mark in late August, according to the Administrative Office of U.S. Courts, and regulators are linking the trend to the increase in credit card chargeoffs.
In addition, a related phenomenon may be sparking some concern among regulators - an increase in what are called "surprise bankruptcies," those filed by customers who have rarely or never been late on their loan payments.
A Fed study released in August found that two-thirds of banks surveyed said they were charging off more consumer loans than expected with respect to the number of customers with delinquent loan payments.
"This is a concern because it makes it very difficult for a bank's models to predict credit risks," said the FDIC's Ms. Helfer. As a means to better predict credit risk, she recommended that banks pay close attention to how many credit cards their customers and potential customers own.
Despite the fact that regulators appear confident about the industry's ability to handle the slippage in consumer credit quality, they aren't sitting on their hands.
The Comptroller's Office is planning to issue examiner handbooks on installment lending, credit cards, and other lending areas.
The FDIC is conducting special quarterly exams of banks that specialize in credit card lending.
And a group of Fed examiners is reviewing the retail credit and credit scoring operations of large bank holding companies.
