Credit Card Charge-Offs Spiked in the Fourth Quarter of 2005

The latest bank regulatory filings released by the Federal Deposit Insurance Corp. showed consumer credit as the sector moving significantly against the industry trend of low asset credit cost, according to a statistical study published by A.M. Best Co.

Consumer charge-offs accelerated during the fourth quarter of 2005 for some of the largest banks with high consumer credit exposures due to the new bankruptcy law that went into effect as of Oct. 17, 2005. In the week before the deadline for filings under the old law (which permitted all debts to be wiped out by an individual after a Chapter 7 bankruptcy filing), as many as 480,000 reported cases were filed. It is estimated that as many as 2 million filings may have been recorded for 2005, a 50% increase from typical levels.

Credit card charge-offs spiked by 22.7% from the level of the fourth quarter in 2004 for the industry in aggregate, based on FDIC data. Other loans to individuals registered close to a 13% increase in charge-offs as compared with the same quarter in 2004. The largest banks reported substantially higher charge-off figures. (For a list of the five largest card-issuing bank holding companies click here www.ambest.com/banks.)

Independent of the immediate effects of the new bankruptcy law, banks have been increasingly aggressive in pursuing the subprime segment of the credit card market, at a time when the consumer sector is expected to be under pressures from a high debt load. Higher minimum payment requirements on cards also are being implemented by most of the banks. This requirement may force those cardholders who had just been able to make the old minimum payments to become delinquent under the new, higher requirement.

The banks’ fourth-quarter spike in charge-offs also will lead many institutions to replenish their diminished reserves, as well as portfolios. In turn, this might have an effect on the risk appetite of banks for new accounts and underwriting standards in 2006.

In the month immediately following the Oct. 17 deadline date, the number of bankruptcy filings dropped to one-tenth the typical level. However it is expected that the levels of charge-offs and delinquency rates for credit card portfolios of banks will remain high, albeit not close to the levels seen in the fourth quarter of 2005.

Best’s Banking Center provides online access to data, special reports, analytical methodologies and news on the U.S. banking industry. For a complete overview, please visit www.ambest.com/banks.