Banks are bracing for consumers to stop paying off their credit cards, delinquency rates hit 12-year high
Banks are bracing for consumers to stop paying off their credit cards, delinquency rates hit 12-year high
Provisions for credit losses rose at JPMorgan, Citi, Wells Fargo, and Bank of America last quarter
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Bracing? Wont they make huge profit on the absurdly high interest?
Of course some may default, but its extra profit from the others.
Its profit in the long run yes. But in short term extra people accumulating debt means less cash floating around the bank to put into other investments.
This can be an actual problem if it someone goes to withdraw their balance and the bank literally doesn't have money becuse too many of their credit users spent the banks cash.
Nah, that's what the federal reserve is for.
Banks also need to hold on to cash if you have a massive credit line, even if it's not used, because they need to be ready to use it. So banks already have reserves to handle increases in demand, and they can close some dormant accounts to free up cash if needed. For example, I have something like $100k in total credit limit across a dozen or so cards, get I only use like $4-5k at a time and pay mine off every month. So I'm taking a disproportionate share of the total credit limit, so banks want to close my cards (and they have closed like 2 in the past year due to lack of use).
It's not like the banks need to set aside the full $100k that they extend to you on paper .. they have to have "assets" of about 1/10th of that ...
Fractional reserve banking . Basically just create numbers out of thin air
Sure, they don't need the full $100k, but they will need to make sure they can cover that full $100k if you end up using it. There's a lot of statistics behind it, but in general, the higher your credit limit, the more cash they need to keep on hand, and if you're only using like $100 of that, you're a much less attractive customer than someone spending $100 on a $1k limit. There's a cost to that limit, and the banks wants to make a profit from any limit they extend.
Also, fractional reserve banking doesn't come from "thin air," they are based on strict regulatory rules and statistics to make sure both the regulators and the bankers are comfortable with the level of risk. If they need additional cash, there are mechanisms for that (e.g. borrowing from other banks at a given interest rate).
It is still extremely far from the old days when money lent, was money/gold in the vault
I have a easier time accepting 8% interest charge when someone actually took money out of their pocket to lend me versus a ponzi like scheme with "strict regulatory rules and statistics blah blah loan loss provisions" (which sounds wonderful and for our good and safety).
They make a shit ton of money..
The models are just risk and likelihood based to determine cash requirements and how much they can lend out (way more than cash they have) yet they charge the same fee as if they had the funds.
I'd rather borrow from my grandma and pay her 8% since she deserves it for parting with her money.
Idk, it's not that different, just a lot more complicated. If the bank doesn't have the cash to sell a loan, they'll buy that cash from another institution that does have it to give the cash to the borrower. At the end of the day, the cash needs to exist for the bank to issue the loan, the bank just doesn't need to have the cash itself, and the bank can buy cash from banks with other assets (i.e. loans). Interest on customer deposits are cheaper than buying cash from other banks, so banks want to attract more deposits.
So if we bring it back to grandma, let's say we do something like this:
- you borrow $10k from grandma at 5%
- your friend (A) borrows $8k from you at 10%
- your friend loans $6k to another friend (B) at 15%
And here's how the various accounts look:
- grandma - $10k IOU
- you - $2k cash, $8k IOU, -$10k loan
- A - $2k cash, $6k IOU, -$8k loan
- B - $6k cash, -$6k loan
If we only look at the asset column, we get $34k. That's essentially how banks work, but on a broader scale. If grandma calls your loan, you'd only be able to hand her $2k immediately, but you would probably eventually get the full $10k (and maybe some profit) from A, who would get it from B. But if she really needs the full $10k now, you'd both have a problem.
And that's where the FDIC comes in. Let's say you were FDIC insured, and grandma instead gave you $10k as a deposit (not a loan). If she wanted the full $10k and you weren't able to provide it, she could go to the FDIC to get that money, and the FDIC would take over your bank to get the cash from A and then B (though grandma doesn't have to wait for that).
So really, the modern banking industry isn't really any different from borrowing from grandma, it's just a lot more complex because there are more moving parts.
They also hedge and buy insurance to cover potential defaults and then they write off the bad loan they got stuck with to help offset taxes... So it's kinda good in a way and they want some but it makes business sense to find the right balance to keep regulators happy and make maximum profit.