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

A consequence of the increase in consumer borrowing of recent years is that debt-servicing requirements - that is, the amount of scheduled payments of principal and Interest - have consumed a bigger share of disposable income. Our staff estimates that this ratio, which includes both mortgage and nonmortgage payments, peaked in late 1989 at about 17 1/2 percent and then declined over the next four years to about 15 1/2 percent in 1993, as households curtailed their borrowing and average interest rates on their debts fell. Since then, the ratio has risen to about 16 3/4 percent. This standard measure is based on aggregates that include households without debt and uses estimates of scheduled payments. The Survey of Consumer Finances, conducted periodically by the Federal Reserve, suggests that the median ratio of actual debt payments to pretax income of debt-holders was relatively constant from 1989 to 1995, as was the proportion of the debt-holders that had very high debt repayment to income ratios. What has tended to rise over time is the proportion of low-income households with an unusually high fraction of their income absorbed by debt repayments. Unfortunately, the latest data - which are still preliminary - are a year old.

To be sure, some of the increase in consumer debt is merely a reflection of the greater prevalence of convenience use of credit cards as a substitute for cash or check payment, with card balances paid in full each month. This trend has been reinforced in recent years by a variety of incentives, such as the availability of frequent flier miles. But - as our Survey of Consumer Finances suggests - there are also signs that some households have let their debts build up to the point where they may have difficulty servicing them. Loan delinquency rates and personal bankruptcies are both up.

Generally speaking, delinquency rates on nonmortgage consumer loans have been trending up for the past year, with some of the increase in delinquency rates merely the result of the "seasoning" of recently underwritten loans, a typical pattern. However, for credit cards, the widely followed statistics of the American Bankers Association show that the delinquency rate by number of accounts is historically high. The more comprehensive figures from the official bank Call Reports based on the dollar volumes of loan balances, however, show a much milder upturn in delinquencies - but still one warranting our attention.

CREDIT CARD LENDING BY COMMERCIAL

BANKS

These economic and market developments have had clear effects on banks. As a percentage of total bank loans, consumer debt (including mortgages) has been increasing steadily for some time - from 33 percent of total bank loans in 1980 to roughly 40 percent five years ago and about 44 percent today. This shift in asset allocation by banks reflects several factors, not the least of which is a declining market share of the credit extended to commercial customers. In part, it also reflects substantial growth in credit card debt. Since late 1991,credit card debt has risen about twice as fast as total loans. If one adds back estimates of the outstanding securitized credit card debt of banks, such credit has risen almost three times as fast as total loans at banks.