The Federal Reserve’s most recent annual stress test — the Comprehensive Capital Analysis and Review — revealed that credit cards rank at the top of the risk list for banks’ potential losses.
According to a Wall Street Journal report, the Fed’s hypothetical recession calculation has banks projecting $100 billion in credit card losses. The report marks the first of a two-part exam ending next week, the results of which determine if the Fed will allow big banks to buy back shares or boost dividends.
The report noted the first phase of the test placed credit cards at the top of the risk list, indicating the sector could see losses on par with commercial and industrial loans. Stress tests from 2016 predicted credit cards could create losses up to $92 billion, putting the sector in third place after trading and counterparty losses and commercial and industrial loans, according to the WSJ.
While credit card defaults had dipped to record low territory in recent years, the rate is increasing and sparking concerns that losses in the credit card market might be coming. The Fed’s report noted credit card balances are rising, recently surpassing $1 trillion for the first time since the start of the Great Recession.
Several factors contribute to the increase in credit card losses in the Fed’s scenario, including a rise in unemployment.
The report noted the potential severity of the scenario, with the WSJ citing Capital One Financial Corporation’s credit card potential losses at $21.7 billion compared with $18 billion the previous year, Discover Financial Services’ at $8.7 billion versus $7.6 billion and JPMorgan Chase & Co.’s card losses at $15.7 billion compared with $13.9 billion.