Credit cards the choice of last resort

From Minyanville today:

On Friday, several pieces of key bank data were reported by the Federal Reserve:

First, for August, non-mortgage consumer debt rose at an annual rate of 5.9%, up from 4.7% in July. The bulk of the increase came from revolving debt, principally credit cards, which rose at 8.1% versus 7.5% in July.

To frame the revolving credit figure, here is some historical data:

Year	Annual Growth Rate
2003	2.3%
2004	3.8%
2005	3.1%
2006	6.3%
June 2007	7.1%
July 2007	7.5%
August 2007	8.1%

That credit card debt growth is accelerating at a time when retail sales growth is slowing suggests that more consumers are turning to their cards to finance their basic monthly cash flow. As I have said previously, it appears that the credit card banks have become the consumer lender of last resort. How long this can continue, particularly with the slowdown in personal income growth, (from 0.9% monthly income growth in January to 0.3% in August) remains to be seen.

Second, the weekly report on system-wide bank balance sheets showed a surprising $100 bln increase in bank assets for the week following the Fed Funds rate cut. I, and others, had expected to see a decline in bank balance sheet assets, figuring that the rate cut would have paved the way for banks to move some more liquid loans or securities off their balance sheets and into the secondary market. That this did not happen suggests that either corporate borrowers are hoarding liquidity by drawing down credit lines or the secondary markets have not fully responded to the rate decline. At the same time, system-wide net assets (a proxy for capital) showed a $15 bln decline for the week.

For the record, since May, when it peaked, net assets (again, a proxy for capital) for large U.S. banks has dropped by $55 bln - or 7% (from $740 bln to $685 bln), while over the same period, total assets for large banks has grown by $228 bln - or 4% (from $5.607 trln to $5.835 trln). Furthermore, substantially all of this growth was funded through non-deposit debt sources.

To return large bank capital ratios to their peak May levels would require either an $85 bln increase to capital or a $640 bln reduction in assets.

While the “all clear” whistle may have blown for the stock market, the growth in system-wide bank balance sheets, particularly credit card balances, coupled with a meaningful decline in large bank capital levels indicates to me that our banking system is being stretched.

It was inevitable that once the MEW(mortgage equity withdrawal) ATM's were removed from the front lawns of the average American household that credit cards would become the credit source of last resort.