Smaller banks are facing a concerning rise in credit-card delinquencies, according to the Wells Fargo Investment Institute. As the total amount of debt surpasses $1 trillion for the first time in history and many consumers exhaust their credit, the delinquency rate of credit-card debt at small and medium-size banks has reached a record level, approaching 8%. This surpasses the previous peak rate observed during the 2007-2008 global financial crisis.
Even banks of all sizes have experienced an increase in credit card delinquencies, following historically low delinquency rates during the pandemic. The surge in fiscal and monetary support provided to households and businesses has contributed to this trend.
In addition to credit cards, car-loan delinquencies have also been on the rise. The New York Federal Reserve's second-quarter household-debt survey reveals that while applications for credit cards and car loans have increased, borrowers with lower credit scores are being denied more frequently.
This tightening of credit standards can be attributed to the aftermath of several regional bank failures in spring 2023. Since then, the Federal Reserve has swiftly raised its short-term rate to the highest level in 22 years - currently between 5.25% and 5.5%. With the aim of bringing down inflation to its 2% annual target, the central bank may further increase interest rates.
Related: Subprime auto defaults on path toward 2008 crisis levels, say portfolio managers
Households and Wall Street Await Clarity on Rates from Fed Chair Jerome Powell
Households and Wall Street are eagerly anticipating insights on interest rates from Fed Chair Jerome Powell during his speech at the central bank's annual economic summit in Jackson Hole, Wyo. This event serves as an opportunity for Powell to offer valuable perspectives on the economy.
The Impact of Inflation Concerns on Jobs and Economic Growth
During last year's summit, Powell emphasized the potential cost to jobs and economic growth when tackling inflation. It highlighted the delicate balance needed to bring down inflation without negatively impacting employment and overall economic progress.
Credit Card Delinquencies Pose Challenges for Small and Medium-Sized Banks
According to analysts from the Wells Fargo Investment Institute, the increasing rate of credit card delinquencies is placing added stress on small and medium-sized banks. Moody's Investors Service and S&P Global Ratings have already downgraded several regional banks in August, leading to a decline in the KBW Regional Banking Index XX:KRX for the seventh consecutive day. As of Tuesday, the index has fallen by 11.1% for the month, according to Dow Jones Market Data.
Market Performance and Outlook
Although stocks experienced a brief rebound on Monday, Tuesday saw declines across major indices. The S&P 500 SPX decreased by 0.2%, while the Dow Jones Industrial Average DJIA dropped by 0.5%. The Nasdaq Composite Index COMP also experienced a decline of 1%, as reported by FactSet.
Optimistic Outlook Despite Consumer Credit Exhaustion and Slower Income Growth
The Wells Fargo Investment Institute team remains cautiously optimistic about the economy, even as consumers face credit exhaustion and income growth slows significantly. They predict a short, moderate recession followed by a recovery throughout most of 2024, likely extending into 2025.
See: Jackson Hole meeting: When is Jerome Powell's speech? What investors need to know.