Statement by Janet L. Yellen, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Regulatory Relief, Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 24, 1996 - increasing consumer credit card debts - Statements to the Congress - Transcript

Federal Reserve Bulletin, Sept, 1996

I am pleased to appear before this subcommittee today to discuss trends in consumer lending and the Federal Reserve Board's view of how recent developments in this sector are affecting U.S. commercial banks. As the subcommittee knows, consumer delinquencies on nonmortgage debt have increased in recent periods and are beginning to affect profit margins at some financial institutions. The Federal Reserve has been monitoring these conditions and discussing their implications with individual banking organizations and industry groups. However, given the generally strong financial condition of the institutions most affected by these developments and that of the U.S. banking system, we believe that these adverse trends do not currently present a material threat either to individual banking organizations or to the overall banking system.

In my remarks, I would like to begin with an overview of the economic developments that have caused the Federal Reserve to devote greater attention to consumer lending matters. I shall then turn to the emerging - and still well-contained - consequences that these developments are having on the banking organizations that are most affected and on the industry overall. Because current concerns are predominantly centered on revolving credit portfolios, I shall focus my comments on a discussion of credit card lending activities. Finally, I shall discuss the steps taken by the Federal Reserve throughout the past year to caution its examiners, state member banks, and bank holding companies about the risks inherent in weakening credit standards and to ensure that financial institutions are taking appropriate action to address emerging problems in consumer loan portfolios.

ECONOMIC TRENDS

Economic conditions in the United States have in recent years been favorable to growth in spending and borrowing by the household sector and to strong growth in consumer lending by US. banks. Just since early 1992, nonfarm payroll employment has increased nearly 11 1/2 million, driving the U.S. unemployment rate to 5.3 percent in June of this year, its lowest level in six years. As one consequence, personal income has risen substantially. The dramatic rise in stock and bond prices in recent years has also produced sharp gains in wealth for some households.

During this same time period, rates and fees on consumer financing products have been coming down. Average credit card rates, which stood at about 18 1/4 percent in late 1991, declined to less than 15 1/2 percent by May of this year. At the same time, annual fees on credit cards were dropped by many institutions. In addition, declining residential mortgage rates throughout most of this interval contributed to a significant reduction in monthly payments on such debts. While mortgage rates have recently backed up, the relatively low mortgage rates of the early 1990s precipitated a refinancing boom that allowed many consumers to significantly reduce their monthly mortgage obligations.

Combined, these generally favorable developments have given consumers the confidence and financial foundation to incur additional debt to finance major purchases. Nevertheless, some concerns remain about the increase in consumer debt. Aggregate statistics do not address conditions in individual households, an important consideration because the economic expansion has not affected all households equally. Further, while for some households the use of credit in making a purchase is simply a matter of convenience or a means of managing liquidity, for others borrowing may be a means of sustaining consumption through a period of household economic distress.

Nonmortgage consumer debt has grown at double-digit rates over the past two to three years. This rapid pace is not unusual for a period of economic expansion. Indeed, as the economy emerged from recession in 1991, growth in nonmortgage consumer debt was much slower than typical, reflecting sluggish spending on durable goods and lingering fears about long-term layoffs and other threats to job security. However, by 1994 consumer confidence had recovered considerably, and demand for autos and other durable goods had strengthened. Nonmortgage consumer debt grew about 15 percent that year and the next, but even this rapid pace remained below that of a decade earlier. Lower inflation in recent years can account for some of the difference.

Recently, revolving credit - primarily credit card debt - has been, by far, the fastest growing component of consumer debt, averaging annual increases of 20 percent over the past two years. However, that performance - rapid growth during an expansion - is also typical of the past two decades. The cumulative effect has been a dramatic rise in the relative importance of revolving credit. In 1977 when first reported separately to the Federal Reserve, revolving debt of U.S. consumers totaled $30 billion, or 14 percent of all consumer debt. In May of this year, the amount outstanding was $444 billion, or nearly 40 percent of the total. Surveys show that 80 percent of U.S. households now have at least one credit card.