U.S. banks tighten credit card lending too late

By Juan Lagorio - Analysis

NEW YORK (Reuters) - Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.

Still, the measures may fall short in containing a growing area of stress on banks' balance sheets that some experts say could rival the subprime crisis.

"It's so similar to the mortgage situation that it is shocking when you think about it," former Goldman Sachs chairman John Whitehead said at the Reuters Global Finance Summit.

And even though credit card debt is only a fraction of mortgages, it will be another unwanted hit to major issuers like JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), American Express Co (AXP.N) and Discover Financial Services (DFS.N) who cannot afford another round of heavy losses.

"We've never had so much debt with the unemployment rate heading toward 8 percent," said Walter Todd, a portfolio manager at Greenwood Capital Associates. "It's hard to run a model because it has never happened before."

Outstanding consumer credit has more than doubled since 1994, the last time unemployment was at current levels, and it is seven times higher than in 1982, when unemployment peaked at 9.7 percent. Some economists expect unemployment in the current slowdown to top out at 9 percent.

CASCADE EFFECT?

Financial institutions globally have already written down more than $500 billion in toxic loans and other bad assets as a result of the credit crisis sparked by the meltdown in the U.S. housing market.

Trying to avoid a repeat of the subprime crisis U.S. banks have been tightening credit card lending standards especially in states such as California and Florida that were hardest hit by the housing downturn.

"If you are not fearful, you're crazy," said Jamie Dimon, JPMorgan's chief executive, in his last conference call with analysts, adding that the bank was doing its best to modify the terms of credit card agreements where it sees danger.

According to a Federal Reserve report, 60 percent of banks surveyed had made it tougher to qualify for a credit card account since July, and half of them had lifted credit scores required on credit card accounts.

In addition, the number of credit card offers sent by mail has declined to its lowest point in over three years, according to research firm Mintel Compermedia.

"Now we are looking for even greater ability to handle debt and we've changed our criteria in different geographies," said Roger Hochschild, president and chief operating officer of Discover, in an interview with Reuters.

Citigroup said on Friday it was raising interest rates on some cardholders, though it did not say how much they would be raised or how many customers would be affected. The Wall Street Journal reported the increase would be by an average of three percentage points and affect millions of customers.

Others have also had to take tough measures to fight higher credit losses. American Express will cut 7,000 jobs, investments and expenses to save $1.8 billion next year. In addition, this week the company transformed itself into a bank to have access to cheaper funding and government money.