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Charge-off data indicate reduced stress on consumers [ClearOnMoney]
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Charge-off data indicate reduced stress on consumers

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Commentary

Charge-off data indicate reduced stress on consumers

6 Mar 2012 by Jim Fickett.

As of Q4 2011 the credit card charge-off rate had dropped back below its 28-year average. This indicates that in some areas, at least, the household sector has made good progress in putting the financial crisis behind it.

Recently the FDIC released the Quarterly Banking Profile for Q4 2011. About charge-offs (loans written off as uncollectable), they say,

Loan Losses Fall to Lowest Level in 15 Quarters

Net charge-offs totaled $25.4 billion in the fourth quarter, a decline of $17.1 billion (40.2 percent) from a year ago. The fourth-quarter total represents the lowest level for quarterly charge-offs since first quarter 2008. This is the sixth consecutive quarter in which charge-offs have posted a year-over-year decline. Improvements occurred across all major loan types. The largest declines were in credit cards (down $5.4 billion, or 42.2 percent), real estate construction and land development loans (down $3.3 billion, or 62.4 percent), residential mortgage loans (down $2.4 billion, or 31.8 percent) and loans to commercial and industrial (C&I) borrowers (down $2 billion, or 43.5 percent).

Taking a longer view, we can see that both the total charge-off rate (blue solid line) and the charge-off rate on credit cards (red solid line) are nearer to long-term average levels (dashed lines) than to the horrendous peaks of the crisis:

The total charge-off rate has come down a lot from the peak, but is still above its long-term average. In fact it is still above the average rates of earlier recessions. This is not too surprising given the state of, for example, the mortgage market. The condition of the banks is improving, but there is still quite a ways to go.

There is no one overall indicator of credit stress in the household sector, but the credit card charge-off rate is one useful measure. The fact that credit card charge-offs have indeed come all the way back down to their long-term average does suggest that the household sector has made at least some of the longer-term adjustments necessary following the crisis. Of course the fact that there are still millions of home forfeitures to come (US home forfeitures) indicates that the adjustments have not occurred in all areas, but at least some progress is being made.