Behind Banks' Credit Card Moves
Another FT article goes deeper into the increasing danger credit cards are putting banks into, and what they’re doing about it. Some scary stuff here.
Record credit card losses force banks into action
By Saskia Scholtes in New York
Financial Times
Published: July 1 2009 03:00 | Last updated: July 1 2009 03:00
Losses on US credit cards hit a record 10.44 per cent in June, squeezing profit margins for credit card securitisations to a 10-year low, according to Fitch Ratings.
Profits from off-balance sheet vehicles backed by credit loans in June fell below the 5 per cent threshold for the first time since November 1998, said Fitch.
Credit card securitisations have built-in triggers that force early repayment when profits fall below zero. Such triggers are designed to protect investors from prolonged exposure to bad credit card loans.
Rising losses on credit cards have in recent months pushed US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investors.
Banks have also raised interest rates on credit cards to counter rising borrower defaults, late payments and boost profitability, underlining how the deteriorating health of US consumers is opening new fronts in the financial crisis.
