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

The Federal Reserve has also recently undertaken a number of initiatives to focus its examinations more tightly on the activities exposing financial institutions to significant risks and to heighten its emphasis on evaluating management processes to identify, measure, monitor, and control the risk of banking activities. We believe that these enhancements to our supervisory procedures will further improve our ability to detect nascent problems - such as those arising from the increased and more accommodating consumer lending of recent years - and will foster appropriate responses by bank management. Consistent with these initiatives, an inter-District task force of Federal Reserve examiners is currently conducting a comprehensive review of the retail credit and credit-scoring operations of several large bank holding companies.

Earlier this year, we also implemented procedures whereby examiners assign specific ratings to an institution's overall risk-management processes, including its internal controls. This requirement, we believe, further highlights the importance of sound management practices and should help to provide more specific feedback to senior management of the examined institution. In the context of consumer lending, such assessments generally address a banking organization's operating strategies for increasing market share, its goals, and the controls in place to maintain credit standards, including ongoing review of the credit strength of its loan portfolio. Examiners also typically evaluate the adequacy of the institution's information systems and the appropriateness of the information provided to directors and senior managers.

Recently, our supervisory activities, surveys of examiners, and discussions with bankers all have supported the view that banks are recognizing weaknesses in the consumer lending market and are actively adjusting their underwriting and monitoring procedures for these loans. Some banks have also increased their levels of reserves for these loans in recent months.

I should also note that in each of the two most recent Federal Reserve Senior Loan Officer Surveys, approximately one-quarter of the respondent banks, on net, had tightened underwriting standards for approving new credit card applications. More broadly, the proportion of respondents less willing to make consumer installment loans slightly exceeded the proportion that was more willing to lend, for the first time since 1991. Such a revisiting of current credit standards and practices seems well considered, given the length of the current period of economic expansion and the signs of weakness in some elements of consumer finances that we have seen.

Conclusion

To sum up, the rapid growth in consumer lending by banks, particularly that involving credit card loans, reflects a natural evolution of banking activities toward the household sector and has generally enhanced consumer convenience and produced significant profits for banks. In recent years, this growth has been caused, in part, by aggressive solicitations of credit card customers by a relatively small number of large bank and nonbank organizations and by an active market for securitized credit card debt.