UNEMPLOYMENT WITH MALAYSIAKINI: Bankers worst nightmare materialise

Bankers worst
nightmare materialise

HoweStreet.com
28.1.2009

Bankers' worst nightmare is the unemployment rate climbing toward 10%, a level at which credit losses could balloon unpredictably because of high defaults among people with previously strong credit histories.

Right now, bank balance sheets don't appear in a position to deal with unemployment moving sharply higher from its current 7.2% rate.

Building up bad-loan reserves to deal with a 9% to 10% rate could produce enormous losses and pulverize capital when banks are trying to preserve the thin cushions they have. And fear of rising unemployment could deter lending when the government wants banks to expand credit. True, the Obama administration's stimulus plan could reduce unemployment expectations. But right now, banks are hoisting their joblessness forecasts.

Last week, consumer lender Capital One Financial increased its unemployment forecast to 8.7% by the end of 2009, from its previous expectation of 7% by midyear. And Capital One added that it is building more-severe unemployment scenarios into lending decisions.

Also last week, Kelly King, chief executive of regional bank BB&T, said unemployment of 8% to 8.5% is "kind of manageable," but 9% to 10% would "have a dramatic impact on our scenarios."

Why the trepidation of going above 9%? Take a regular credit-card book. Past data show that a percentage-point increase in unemployment leads to roughly a percentage-point rise in the charge-off rate, the amount of defaulted loans written off at a loss.

But as unemployment exceeds 9%, bankers think charge-offs will start to increase by more than the increase in unemployment. The reason? A high rate could cause an unprecedented wave of defaults among prime borrowers, who tend to have bigger loan balances.

"The situation is so extreme and beyond what we've seen in past cycles that management teams are becoming reluctant to predict the relationship between unemployment and credit losses," said Kevin Fitzsimmons, analyst at Sandler O'Neill & Partners.

House of Cards

Even as the subprime mortgage fallout continues its ripple effect across the economy, fiscal storm-watchers have an eye on the next gathering cloud: nearly $1 trillion of consumer credit card debt. Defaults are up; in November, the percentage of charge-offs — money card issuers give up on ever collecting — rose to 5.62 percent. According to some economists, that percentage could double before this current downturn is over. The bearish RGE Monitor predicts the default rate could rise as high as 13 percent, eclipsing the previous high-water mark of a 7.85 percent in the first quarter of 2002.

This is bad news for the banks and third-party investors that hold this debt, as well as for consumers hit with the double-whammy of rising unemployment and restricted credit. Americans are relying on their credit cards to an ever-increasing degree. In 2008, the average credit card balance was $11,212, according to CardTrak.com. Compare this to 15 years ago, when the average credit card debt was a comparatively paltry $4,306. Factors like California’s plan to delay income tax refunds and long-jobless workers running out their unemployment benefits don’t help the situation, either. With no silver-bullet solution in sight, economists and analysts are nervous.

Credit card companies have already started to batten down the hatches by cutting cardholders credit limits and raising interest rates. “What institutions are doing now is circling the wagons,” said Dennis Moroney, research director, bank cards, at finance-industry research firm TowerGroup.

Additional retrenchment looks inevitable. Although about half of all credit card debt has been repackaged and sold as securities, it’s a much smaller pool of capital than the mortgage securities market, so a rise in default rates probably won’t cause the kind of systemic domino effect that the mortgage collapse triggered. It will, however, make third-party investors much more reluctant to purchase such debt — and risk getting burned — in the future. With mounting default losses on their own books, banks will have to raise more capital to meet their reserve obligations. Like a retailer trying to unload Christmas paraphernalia on December 26, they’ll have to slash prices if they want to attract buyers. As a result, consumers — especially those with blemished credit — are going to have difficulty securing loans or lines of credit.

In addition, the banking industry contends that new regulations passed by the Federal Reserve last month will give them no choice but to sharply curtail lending — putting at risk the consumer purchasing power that drives 70 percent of spending in the U.S.

Credit Squeezed

Credit card issuers are using a host of measures to make sure customers make their payments and fees keep coming in, now that banks are feeling as squeezed as their financially pinched consumers.

Some card issuers are clamping down on late payments and grace periods as they near new, stricter credit card regulations that go into effect in July 2010, consumer advocates say. Some lenders also are working out payment plans and, in certain cases, lowering interest rates for delinquent customers who are having a hard time keeping up with their bills.

The industry also is bracing for sweeping changes approved last month by the Federal Reserve to revamp rules governing penalty fees and rates. Among other things, card issuers will be required to send a bill at least 21 days before the due date so consumers have time to make payment before getting slapped with a late fee. And bankers won't be able to raise rates on existing balances unless a payment is more than 30 days late.

"They see the writing on the wall, and when these rules take effect, their ability to impose penalty rates and penalty fees are going to be so greatly curtailed that in the interim period they'll be aggressive in trying to impose fees to the letter of the law that's in the account agreements," said Ben Woolsey, director of marketing and consumer research at creditcards.com.

With economic conditions deteriorating, card companies are stepping up their collection efforts in hopes of recouping what they can from consumers. They're also taking more telephone calls from cash-strapped customers.

Discover Financial Services has hired staff to respond to customers seeking help and launched a section on its Web site where cardholders can find more information on getting payment assistance.

American Express is calling card members in earlier stages of delinquency and offering payment plans that offer "flexibility around the interest rate, fees and plan length."

And Bank of America is waiving fees and reducing interest rates on monthly payment programs. Last year, the bank said, it modified nearly 700,000 credit card loans.

[Bankers' Worst Nightmare Materialize
HoweStreet.com, Canada ]

SEEKING WITH MALAYSIAKINI: heavy curtain on 4,700 lost

The year is about to end. Next year will come but the curtain is far too heavy to draw. Malaysiakini signals the worst yet to come as the curtain is drawn exposing a glimpse of unemployment on the rise.

• 
  

• Over 4,700 to lose jobs in next 3 months from Malaysiakini
• Dec 23, 08 12:12pm
• More than 4,700 will lose their jobs in the next three months as the electronics sector is hit by the global economic downturn.

2. Lets be frank with one another. It doesnt matter how much extra adrenalin we have in our blood streams, how many drifts the kids can do with their bikes in JERIT, how many millions can be awarded by our own courts to the lucky ones, but jobs/employments are too sacred to the livelihood of folks.

3. With it comes money, food, cars, bikes, handphones, flights, courts (?), books, pencils, erasers, shoes and slippers. Folks got to live and folks need money. Employment do provide some basic human existence.

4. A respected blogger Dato Ruhanie Ahmad in his kudakepang blog cautioned what lies behind the heavy curtain as year 2008 is getting out. The malays will be most affected as the global economic downturn rolls in and out. So what is to become of them.? [MAJORITI MEREKA ADALAH MELAYU kudakepang ]

5. It is going to be a bitter journey forward. Huge investment in economic corridors may not necessarily bring in real employment as you and me understand. The early phase of development will comprise of construction works and the place will be crowded with expected bangladeshis, indons or myanmars.

6. Some ministers explain what the goverment will do. One is retraining is to be given to the retrenched workers to improve their chances of securing jobs in other fields. The coming by election in Kuala Terengganu and the sign of stormy weather in Bmi Kenyalang will see issues on unemployment debated openly. Or Hudud is still the anchor?

But having RM120,000 or RM30,000,000 twice will be very handy indeed for those retrenched. I am sure mahfuz and Teresa will be more than a dermawan.

On a more positive note, I guess malaysians are generally very resilient, they will survive somehow, because on the simplest living ubikayu and ikan keli are in abundance.



beritadarigunung