The credit card industry in the US could reduce credit lines for its customers over the course of the next year and a half to the tune of over $2 trillion, on account of developing risk aversion and regulatory changes.
This, in turn, is likely to be the cause of sharp declines in consumer spending, according to reports quoting banking analyst of Oppenheimer & Co., Meredith Whitney.
Reports quoted the banking analyst as saying that the broad expectation was a decline of around 45 per cent in terms of available consumer liquidity that takes the form of credit card lines. That would mean a reduction of around $2.13 trillion, estimated basis the total credit lines available from all lenders insured by the Federal Deposit Insurance Corp. (FDIC) as of 30 June.
Whitney said that the credit card is the second main source of consumer liquidity, with jobs being the first. ''We are now beginning to see evidence of broad-based declines in overall consumer liquidity,'' she wrote in her research note, predicting reductions that will bring ''a pronounced downshift in consumer spending'' along with a rising jobless rate.
The report said that surviving giants Bank of America, Citi, and JPMorgan Chase & Co together represented around half of estimated US credit card outstandings at the end of September.
Each of these financial institutions is reported to have evaluated the possibility of reducing their exposures on their credit card portfolios, which would most probably take the shape of closure of millions of accounts, reduced credit lines and hiked interest rates. Card issuers are reported to be expecting severe consumer defaults in the coming months.
Whitney was reported as saying that mortgages and credit cards are now dominated by five players, most of whom are pulling back liquidity that would make reductions in consumer liquidity almost inevitable.
She said that the mortgage market would show signs of shrinkage over the next few months, and that the credit card market would follow suit 18 months later, shrinking by mid-2010.