NEW YORK (
) -- Credit card lending has dropped sharply since the 2008 crisis, but even more impressive is the virtual shutdown of the market used to fund those liabilities.
During much of the past decade, banks and other credit card lenders relied increasingly on so-called asset-backed securities (ABS) markets to fund their liabilities. Following the example of innovations in the U.S. mortgage market that began in the 1970's , credit card lenders pooled their loans together to create bonds, whose interest and principal came from payments made by borrowers.
Credit card ABS grew at a steady 10-15% annual rate from the late 1990's to 2007, but the market has been shrinking rapidly. Standard & Poor's analysts believe 2010 credit card ABS issuance will be just $15 billion this year, plummeting from a peak of $120 billion in 2007. And the few credit card ABS that are sold today are being placed in the private market, where deals are generally subject to fewer regulatory restrictions.
Ildiko Szilank, a Standard & Poor's analyst, says a host of uncertainties on the regulatory front have caused issuers to pull back. Among these is rulemaking by the
Federal Deposit Insurance Corp.
regarding how it would treat securitized loans if a bank falls into receivership. The issue mainly affects pools of real estate loans -- but also credit cards, car loans and other liabilities.
The likelihood is that banks will be forced to account for these liabilities on their balance sheets, something they previously had not been required to do. Additional uncertainty comes from credit card legislation known as the CARD Act, which took effect in February, and the Dodd-Frank financial services reform legislation signed by President Obama last month.
The result is that banks are comprising a smaller share of the fast-shrinking credit card securitization market. Szilank says the six largest card lenders,
Bank of America
Capital One Financial
Discover Financial Services
had generally accounted for 90% of the total volume of issuance before the crisis, but that percentage has fallen to about 60% this year.
Banks are cutting back on their overall credit card lending, but a greater share of the credit card loans they are extending are being funded out of banks' deposits, Szilank says.
On the face of it, the fact that banks are using deposits to fund credit card loans suggests banks are taking on more risk in the smaller number of credit card loans they are making, since, rather than selling off the exposures to institutions, they are keeping it on their balance sheets.
However, Szilank says the credit card loans banks are making are subjected to far stricter underwriting standards than had previously been the case, and the overall impact on collateral quality will be positive.
While that may sound like the kind of belt-tightening that has been long overdue for U.S. consumers, what it means for banks profits is not especially encouraging.
Written by Dan Freed in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.