November 19, 2008
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News: Will Stemming Credit Hurt Industry?
Are we dealing with a double-edged sword here? Will the credit-tightening measures being enacted by the credit card industry possible backfire? Some say they will. Securitization, a term little spoke of in the news until recently, seems to be one of the chief problems and the credit card industry is struggling without it and struggling to get it back. Securitization is the packaging of loans (in this case credit card debt) and selling those packages to secondary markets. Up till now, this has been very lucrative. But, as of late, the securitization market is drying up. The reason, of course, is the massive collapse of the sub-prime industry.
Losing that key revenue has seriously hurt the credit card industry, just as the sharp rise of defaulted credit card loans (charge-backs) caused by the phenomenally high unemployment rates has also. There tends to a multi-co-linearity here where, fixing one problem causes another to worsen. What can the industry do about it? Caution is advised here. If they raise finance charge rates the charge-back rates will go up. If they don't, they'll lose the necessary revenue to cover the charge-backs (defaulted loans) that they already have. If they lower credit card spending limits, the severity of defaults will lessen but the attractiveness to the securitization market will go down. It's a tricky balance.
Securitization continues to be a major facet of the credit card industry's wellbeing and has it's own set of rules. Raising interest rates is one way of making debt packages more attractive. This is the tack that is currently being taken by Citigroup, our nation's largest credit card lender. They've had to balance this lever against the losses they will take from a higher bad-debt ratio and the loss of important customers. Part of the trade-off is supported by the extra revenue they will get from those customers remaining with them who can pay the higher finance charges. Their losses in the securitization market have been substantial, so this may pay off.
According to Barclays Capital, the securitization market has gone to a trickle since September. The only new consumer issue has been $500 million in a $2.8 trillion securitization market that is asset-backed. Everyone wants to sell (liquid assets) but nobody's buying. The credit card industry is so dependant on this market in fact, of the $971 billion revolving debt assets (most from credit cards) $460 billion has been securitized. The remaining $511 billion debt-assets were kept by the lenders. These figures from Federal Reserve data.