Worsening unemployment rate to hike bank card losses?

May 21, 2009 | By Jim Kim

Most people were heartened by the Fed's monthly minutes, released yesterday, which suggested that the economy was on the mend. Unfortunately, the Fed also noted that it expects the unemployment rate to rise from 9.2 to 9.6 percent this year. But the Motley Fool says that the Treasury's recently completed stress test assumed in the "adverse scenario" that 2009 unemployment would be 8.9 percent. So it may be that the stress tests underestimated the impact from credit card charge offs.

Research by Fitch has suggested that a 1 percent rise in the unemployment rate is historically matched by a 1 percent rise in charge-offs. JPMorgan Chase and Bank of America have roughly $175 billion each in card loans outstanding. Citigroup has close to $120 billion. Thus, an increase in the charge-offs of even "a few dozen basis points is nothing to sneeze at." It may be that banks are under-reserved for these losses. This is just one more item to keep an eye on.

For more:
- here's the Motley Fool article