Credit Cards, Other Debt Are New Worry for Banks

U.S. regulators said they are watching credit cards and commercial construction loans for signs they may be the next trouble spots as strained financial markets constrain credit.

The housing downturn, with its epicenter in the subprime mortgage market, remained atop the list of concerns. But banking regulators and Federal Reserve officials expressed concerns that credit risks may extend beyond mortgages.

AP

Federal Reserve Chairman Ben Bernanke warned that mortgage delinquencies and foreclosures would likely rise and more house price declines could be expected.

"This situation calls for a vigorous response," Bernanke said in a speech to the Independent Community Bankers of America in Orlando, referring to government and private-sector initiatives to slow the rate of home loan failures.

"Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy," he said.

Stocks fell as investors braced for more bank losses. Several financial stocks, including Citigroup , hit notable lows on Tuesday, while the S&P Financial index broke through its January low. Citi, the Dow's top decliner, hit a nine-year low.

CNBC reported that Citigroup is now expected to cut more than 30,000 jobs in the next 18 months. Also, the head of Dubai International Capital said that Citigroup will need additional capital.

Merrill Lynch cut its earnings forecast for Citigroup, saying it now expects a first-quarter loss of $1.66 a share, compared with its earlier view of 55 cents a share, amid $15 billion in writedowns related to subprime mortgages, theflyonthewall.com reported.

Lehman Brothers and Freddie Mac also reached new intraday lows.

Bernanke's second-in-command, Donald Kohn, said at a Senate Banking Committee hearing that the Fed was also keeping a close eye on credit card, home equity and commercial real estate
loans as banks cope with a widening range of credit risks.

"Federal Reserve supervisors are monitoring these consumer loan segments for signs of spillover from residential mortgage problems, particularly in regions showing homeowner distress, and are paying particular attention to the securitization market for credit card loans," he said. Kohn added that commercial real estate is "another area that requires close supervisory attention."

He noted that while personal bankruptcy rates remained below levels prior to bankruptcy law changes implemented in 2005, they ticked higher over the first nine months of 2007 and
"could be a harbinger of increasing delinquency rates on other consumer loans."

Despite those strains, Kohn said the financial sector remained sound and he saw no threat to banks' viability.

The credit mess that began with failing U.S. subprime mortgage loans has left banks saddled with tens of billions of dollars in bad debts, prompting them to tighten lending  standards. That has slowed the flow of cash to companies and consumers who power the U.S. economy.

U.S. Comptroller of the Currency John Dugan echoed concerns that the credit troubles may spread beyond mortgage loans. Dugan's office regulates about 1,700 of the largest banks.

"Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration," Dugan said.

"We expect losses from home equity loans to continue to escalate as, unlike first mortgages, these assets are largely held on banks' balance sheets," he said.

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