Consumer Credit Outstanding: Are Banks Losing Relevance?

The Federal Reserve Board recently reported that consumer credit outstanding rose by a seasonally adjusted annual rate of 7.4%, $246.3 billion, in March 2015. Over the first quarter of 2015, consumer credit outstanding increased by 5.4%. Consumer credit outstanding now totals $3.363 trillion.

The expansion of total consumer credit outstanding largely reflected an increase in the outstanding amount of non-revolving consumer credit. Non-revolving consumer credit includes auto loans and student loans. According to the report, non-revolving credit outstanding grew by a seasonally adjusted annual rate of 7.9%, $193.9 billion in March 2015 and over the first quarter of 2015, non-revolving credit outstanding expanded by 7.5%. There is now $2.474 trillion in outstanding non-revolving credit.

The amount of revolving credit outstanding also rose in March, the first month-over-month increase since December 2014. Revolving credit outstanding is largely composed of credit card debt. In March 2015, revolving credit outstanding grew by a seasonally adjusted annual rate of 5.9%, $52.4 billion. However, over the first quarter of 2014, revolving credit outstanding declined by 0.3%. There is now $889 billion in outstanding revolving credit.

Presentation1

A previous post demonstrated that the holdings of non-revolving credit by depository institutions have been shrinking over the past 25 years. Presently, the share of non-revolving credit held by depository institutions is third behind finance companies and the federal government. In contrast, depository institutions are the largest holders of revolving credit outstanding. Although its share declined between 1990 and 2003, changes in federal law, which impacted the measurement of revolving credit, pushed its share above its 1990 level in 2010.

As illustrated in Figure 1 above, depository institutions were the largest holders of revolving credit outstanding in 1990 at 59%. The share of holdings of revolving credit by non-financial businesses and the share of revolving credit considered securitized were a distant second and third at 18% and 15%, respectively. However, between 1990 and 2003, the share of revolving credit held by depository institutions declined, largely at the expense of a rising share of securitized revolving credit. The rise in securitizations reflected the increased use of special purpose entities (SPEs), separate entities used to transfer assets, such as the flow of loan repayments, off the balance sheets of financial institutions. SPEs separated the financial institution from the risks of the loans held by the SPE. These SPEs then sold to investors portions of the revenue received from loan payments on the credit held by the SPE. The process by which loan payments on credit held by the SPE were reapportioned to investors is known as securitization.

By 1998, securitized revolving credit, revolving credit that had been transferred from the balance sheets of financial institutions, placed in an SPE, and sold, in pieces, to other investors, became the largest holder of revolving credit outstanding and depository institutions moved to 2nd place. However, in 2010, the share of revolving credit outstanding spiked to 72% from 42% in 2009 while the share securitized through SPEs fell to 12%, from 47% in 2009. According to the Federal Reserve Board, this shift from pools of securitized assets is largely due to financial institutions’ implementation of the FAS 166/167 accounting rules. Since 2010, the share of revolving credit held by depository institutions has steadily climbed and, at the end of 2014, reached 81%.

According to the Financial Accounting Standards Board (FASB), FAS 166 and 167 eliminated the exemption of SPEs from consolidation. Under FAS 166 and 167, financial institutions that created the SPEs that, in turned, owned assets such as loan payments on extended credit, were now required to include the SPEs in the measure of their balance sheets. This moved ensured that SPEs, and the riskiness of the credit that they held but had been originally lent by financial institutions, were accounted for through financial institutions’ balance sheets.

Presentation2

Although depository institutions hold the majority of revolving credit outstanding, revolving credit is the smaller share of total consumer credit outstanding. As illustrated in Figure 2, revolving credit has always been a smaller share of total consumer credit outstanding, but the share of revolving credit outstanding expanded over the approximately 30-year period encompassing 1968 and 1998. However, since then, the share of revolving credit outstanding has fallen and, at the end of 2014 accounted for 27% of total consumer credit outstanding.



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