The statistician W. Edwards Deming once famously said, “In God we trust; all others bring data.” He might well have been talking about federal bank regulatory policy.
At the heart of the industry-supported push to roll back the Dodd-Frank Act are claims by Republican politicians and industry representatives that the 2010 reform law has been killing lending. These assertions, however, should be backed by data.
According to the most recent Federal Reserve Bank of New York data, not only did aggregate household debt in the U.S. increase substantially in the fourth quarter of 2016, it did so across all loan types; residential mortgages, credit cards, student debt and auto loans all rose. As of Dec. 31, total U.S. household indebtedness was $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016.
In fact, Americans are just 0.8% below the peak level of $12.68 trillion in household debt from the third quarter of 2008. Before they seek to unwind the post-crisis regulations, politicians should remember that 2008 was not a great year.
As long as employment levels are steady or preferably rising, and if wages rise from their current levels, one need not be alarmist about the rise in aggregate indebtedness. However, the rise in borrowing in aggregate as well as growth in different types of consumer credit is noticeable. Those concerned about mortgage loans not rising fast enough should take note that there were $617 billion in newly originated mortgages in the last quarter of 2016, the highest level seen since the third quarter of 2007.
Delinquencies for residential mortgages, which account for 67% of total U.S. household debt, are mostly unchanged. Only 1.6% of mortgage balances were 90 or more days delinquent. However, the continued rise in credit cards, student debt and auto loans, is worrisome. In its G-19 Consumer Credit report released in early April, the Federal Reserve Board announced that Americans’ aggregate credit card debt reached $1 trillion dollars for the first time since December 2008. Credit card debt outstanding is now almost on par with auto loans ($1.1 trillion) and student loans ($1.4 trillion).
The Fed’s survey of senior bank loan officers, released in January, shows they are concerned about weakening credit quality. Nearly 37% of large banks expect the quality of their credit card loans to deteriorate somewhat in 2017, and over 38% expect auto loan quality to deteriorate.
Credit card lending has become a leading driver of loan growth for commercial banks. While credit card debt in itself can be quite useful to spur consumer demand, there is now cause for concern with credit card losses at banks and nonbanks rising. On April 17, the Standard and Poor’s/Experian Consumer Credit Default Index showed that the bank card default rate climbed 9 basis points in March, and has now increased for five consecutive months, standing at 3.31%. That rate is up 39 basis points year over year.
Rather than claiming that lending is not rising fast enough, politicians and lobbyists should be aware that the biggest bank lenders are all experiencing credit quality deterioration in their credit card portfolios. According to a Standard and Poor’s research note on April 18, JPMorgan Chase reported a 7.1% year-over-year increase in credit card loans in the first quarter, compared with 6% overall in loan growth. Citigroup also reported a 15% year-over-year increase in credit card loans.
At the same time that credit card loans have risen, so have net credit card chargeoff rates. JPMorgan Chase’s net chargeoff rate was 2.9% in the first quarter, up from 2.6% in both the previous quarter and a year earlier. Citigroup reported a net credit card chargeoff rate of 3.6%, up from 3.2% in the fourth quarter of 2016 and 3.5% a year earlier. Wells Fargo’s credit card chargeoff rate rose to 3.5%, up from 3% in the prior quarter and 3.1% from a year earlier.
Not only should rising default rates within their credit card portfolios be a significant focus for risk managers and bank supervisors, but also student loan portfolios. Aggregate student credit hit the $1 trillion mark a few years ago in 2013. Speaking at an economic press briefing in early April, New York Fed President and CEO William Dudley told the audience that “despite an improving labor market, overall delinquency rates on student debt remain stubbornly high, and repayment progress has slowed further, likely reflecting the recent introduction of more accommodative payment plans.” The New York Fed’s Quarterly Report on Household Debt and Credit showed that 11.2% of aggregate student loan debt was 90-plus days delinquent or in default in the last quarter of 2016.
The fact that we are likely to remain in a low interest rate environment will continue to make it hard for banks to make money in their loan and fixed-income portfolios. Hence, risk managers at banks and bank supervisors should watch carefully that bankers do not fall into the usual trap of chasing yield and lowering their credit due diligence standards in order to make up for the low interest rate environment.
If politicians and lobbyists really care about the state of the U.S. economy and the safety and soundness of banks, they should encourage banks’ risk managers and supervisory authority bank examiners to question the types of loans banks are making and borrowers’ ability to service their rising debt levels in a timely and complete manner. Just as important, financial journalists need to compel politicians and lobbyists to provide data to support their unsubstantiated argument that Dodd-Frank has killed lending.