That is how two Cleveland Fed researchers — O. Emre Ergungor and Patricia Waiwood — interpret the fall of credit card interest rates in the past two years. There is not a mention in their short release of either of the two big payment-card-related legislations passed during that period — the Card Act of 2009 and the Durbin Amendment to the Dodd-Frank act — both of which had a huge impact on the way credit card issuers do business.
While I don’t think that anything that the card issuers have done in the past couple of years can be analyzed in isolation of the accompanying regulatory developments, Ergungor and Waiwood have produced several charts that help us make better sense of recent trends. Let me share them with you.
Outstanding Credit and Interest Rates
Here are the credit card interest rates, presented by the researchers as a spread over one-year treasury notes, since 2000:
So we can see that the interest rates have fallen from their post-Lehman highs, but are still very high by recent (and historical) standards. And now here is the outstanding revolving credit (mostly credit card balances) for the same period, shown as a quarter-over-quarter change:
We can clearly see the inverse relationship between the changes in the interest rate and the outstanding revolving credit, especially in the two recessions covered in these charts. What is less clear, however, is whether the growth in credit card balances will be as robust in the coming months as its decline was steep in the post-Lehman period. The latest Federal Reserve data show declines.
Issuers’ Profits Grow as Charge-offs Decline
We already knew that the profitability of credit card portfolios was growing again which, after all, is what should be happening when delinquency and charge-off rates are moving into record-low territories. And sure enough, profits, measured by the excess spread rate, are as high as they’ve been in at least a decade:
As the charge-offs are expected to keep falling in the coming months and to dip below the four-percent threshold sometime by the end of this year, the issuers’ profits are likely to improve even further.
Moreover, the researchers point out, in the post-Lehman months, “banks could only fund new credit card debt on their balance sheets,” whereas “the market for securitized credit card receivables seized up.” The shift is indeed striking:
I think Ergungor and Waiwood may be overly concerned with “the virtual disappearance of an important funding source.” After all, as they themselves point out, the balance sheet lending is likely to lead “to more responsible lending and sound banking” and that can’t be bad.
Given the magnitude of the 2008 financial crisis, it may not be entirely impossible that its lingering effects are sufficient to explain the fact that credit card interest rates are as high as they are, even as charge-offs are in record-low territory and keep falling and issuers’ profitability is at record-high levels. And yet, it is just as unlikely that the CARD Act and, perhaps to an even greater degree, the Durbin Amendment, should have had nothing to do with it. After all, we know that issuers are looking hard everywhere they can think of for potential sources of new revenue to replace the lost debit interchange income. Credit cards must have been one of the first items on their list.
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