Last week we highlighted the rising level of auto loan delinquencies and the growing number of student loan borrowers who can’t make their payments.
This week, we got some more bad news for lenders. Subprime credit card charge-offs remain at levels reminiscent of the Great Recession.
In the first quarter of this year, credit card charge-off rates at all but the largest 100 banks remained above 7% for the sixth quarter in a row. During the peak of the recession, the charge-off rate at these banks was above 7% for just four quarters, and not consecutively.
The Q1 charge-off rate ticked down slightly to 7.37%, but that wasn’t a big enough drop to push it below that 7% level.
The credit-card charge-off rate at the largest 100 banks rose to 3.78%, according to the latest data released by the Federal Reserve. That’s the highest level since the first quarter of 2013. For all commercial banks combined, the charge-off rate rose to 3.83%, the highest since Q4 2012.
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Smaller banks hold much of the subprime credit card debt. In order to compete with the bigger banks, small financial institutions need to take on greater risk to build their credit base. As a result, delinquency rates and charge-offs tend to run higher for these small-bank credit cards.
Delinquency rates at all but the 100 smallest banks declined to 5.43%, after having spiked to 6.2% in the third quarter. This is a function of banks cleaning up their books and charging off bad accounts. But at 5.43%, the delinquency rate is still historically high. It topped out at 5.9% at the peak of the Great Recession.
As WolfStreet put it, “Some smaller banks that have gone way out on the subprime limb are now getting bogged down in losses on their credit-card loan books.”
America’s small banks hold only a small fraction of credit card balances, so the rising delinquency rates don’t pose any real threat to the banking system. But they should still raise concern.
Currently, Americans carry over $1 trillion of credit card debt, and total consumer debt rose $10.3 billion in March, hitting a record-setting total of $4.05 trillion.
In other words, Americans are loaded up on debt. And it looks like this economic “boom” was built on credit. What happens when the credit cards are completely maxed out? Consider that the last time subprime credit card delinquency rates were this high, the economy was in the midst of a massive recession with unemployment spiraling toward 10%. Today, we’re supposedly enjoying a robust economy with unemployment near historic lows.
WolfStreet gave a pretty good overview of what will likely happen as Americans begin to hit their credit limits.
“Credit card losses already have an impact on the economy, on retail sales, and on the most vulnerable consumers – and this is just the beginning. As banks tighten their lending standards in response to the rising losses, and as more credit-card accounts become delinquent and prevent their holders from buying on credit, the credit flow to the most vulnerable consumers gets throttled. And they have less money to spend. And so they will spend less. This is already the case with subprime auto loans that are now blowing out and that have forced lenders to tighten their lending standards, which is causing a decline in new vehicle sales that is now in its third year.”
This is the proverbial tip of the iceberg. Riskier borrowers with less stable financial positions feel the pain first. Then the problems climb up the ladder. The growing number of people struggling to pay their bills could be a canary in the coal mine.
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