Credit card weakness a vicious cycle for lenders

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - Efforts by large U.S. credit card issuers to gird for historically high customer defaults may actually make the global credit crisis worse.

A seizure of global credit markets has left issuers unable to sell to investors the loans they make. This means issuers must be extra sure that when they extend credit, they do so carefully.

But even better credit control might not stave off the damage, with economies worldwide under pressure and unemployment heading higher, as banks tighten lending.

This deterioration comes on the heels of more than half a trillion dollars of writeoffs of subprime mortgages and other debt industrywide since the credit crunch began last year.

"We, as an industry, may end up with possibly the highest credit card losses the industry has ever experienced," Bank of America Corp (BAC.N) Chief Executive Kenneth Lewis said in Detroit this week.

The desire to thaw credit markets and boost lending is the reason the U.S. Treasury Department threw hundreds of billions of taxpayer dollars at Bank of America, JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Capital One Financial Corp (COF.N) and other lenders to strengthen their balance sheets.

Even American Express Co (AXP.N), with just $11.9 billion of customer deposits, decided to become a bank holding company so it could get some of this new capital.

While banks are growing more comfortable lending to each other, they are demonstrating no such confidence in consumers.

Experts said credit card lending standards were never so bad that the industry were susceptible to the type of meltdown that occurred in the U.S. subprime mortgage market.

And yet, banks are reducing credit further for the many borrowers who can no longer keep up with their mortgage payments or tap their homes for cash

Moreover, they are also making credit less available for lower-risk cardholders, including wealthier ones.

It's a dangerous strategy. Tighter credit can reduce spending, weighing on broader economies. It could also hurt earnings later if issuers lose their most desirable customers.

"If you want your card to be the top card in the wallet, the day you send that letter tightening the credit line is the day you make that customer unprofitable," said Ronald Mann, a Columbia University School of Law professor and card expert.

SECURITIZATIONS STOP

One reason card issuers are cutting back is the seizure of the market for securitizations, which involves the packaging of consumer loans into securities that investors can buy.