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Tightening credit lines at the top five card issuers could cut the overall credit available to U.S. consumers by up to 45%, or as much as $2 trillion, over the next 18 months, according to a report.
Meredith Whitney, an analyst with Oppenheimer & Co. Inc., said in a report published Sunday that risk aversion, funding issues, and regulatory and accounting changes are all driving issuers to rein in consumer credit.
Three major issuers — Bank of America Corp., Citigroup Inc., and JPMorgan Chase & Co. — account for more than half of the U.S. credit card market, and release card commitment data quarterly. Capital One Financial Corp. and American Express Co. round out the top five, and release such data once a year. The five issuers have roughly 68% of the U.S. card market, Ms. Whitney wrote.
In their third-quarter earnings presentations, "most companies noted strengthened underwriting standards and judicious line reductions reflecting an overall reduction in risk appetite in the deteriorating economic environment," Ms. Whitney wrote. "In other words, these companies are reducing their risk profiles by cutting lines," with some focusing their cutbacks on riskier geographies, such as those where home values have suffered.
And "when the top five players decide to dial back on credit, everyone feels the effects," she wrote.
As a source of consumer liquidity, credit cards are second only to jobs — and job losses are rising sharply in many states, the report said.
Lower credit lines and higher job losses are "a dangerous and unprecedented combination," the report said.
Though some smaller financial companies may want to fill the void, few have the resources to do so, Ms. Whitney wrote.
"Notably, MBNA," which Bank of America bought in 2006, "bought up many regional bank portfolios and became the 'private-label' servicer to the regional banking industry," she wrote. "The problem this now creates is that even if regional banks wanted to begin making credit card loans … they lack the processing and servicing capabilities."
Betty Riess, a spokeswoman for Bank of America, said, "We continue to provide credit for qualified borrowers, and as always we continue to monitor accounts for risk and may adjust lines up or down as appropriate, based on the individual's profile and performance with us."
Bob Ryan, the head of product development and innovation for Wachovia Corp.'s card services business, said his company, which is being sold to Wells Fargo & Co., is looking to restrict credit to customers and focus on those with multiple or inactive accounts.
Credit line reduction "is a practice that's going on in the industry, and I wouldn't want to be the last one that didn't do it," Mr. Ryan said Monday.
"I think every issuer is going to look at tolerance for risk and how they can mitigate that risk with line management … that's just part of good credit management," he said.
"Wachovia, like all other issuers, recognizes that we're in, and likely to enter, more difficult times," he said.
Mark R. Ford, National City Corp.'s senior vice president of card products, said his company is seeking to reduce credit for 2% of its lines — a small measure compared to what is expected for the top five, though he said this reflects National City's already conservative approach to offering credit.
"If you cut people's lines … it's going to destroy their loyalty" to issuers "for a very long period of time, so we're trying to be judicious," Mr. Ford said.
As to how much credit should be reduced, he said, "it depends on your outlook. If you think there's going to be a Great Depression, maybe you should cut lines by 45%, but we don't think that."
