2005 Federal Reserve Bulletin
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     Federal Reserve Bulletin - 2005

Recent Developments in the Credit Card Market and the Financial Obligations Ratio
Report on the Condition of the U.S. Banking Industry: Second Quarter, 2005
Legal Developments


Recent Developments in the Credit Card Market and the Financial Obligations Ratio
Kathleen W. Johnson
Over the past fifteen years, U.S. households in the aggregate have devoted an increasing share of their after tax income to the payment of financial obligations. Much of the increase is attributable to a rise in the level of credit card debt, which has raised the share of households' aggregate after tax income that is devoted to credit card payments.

This article argues that three important developments in the credit card market over the period account for most of the rise in credit card payments relative to income and played a strong role in the rise of the total financial obligations ratio (FOR). First, improvements in credit scoring technology and the advent of risk based pricing of credit card debt have increased the share of households particularly lower income households with a credit card. Second, in the 1990s, credit card interest rates began to vary with changes in broader market interest rates, which in turn led to an especially pronounced decline in credit card interest rates when, beginning in 2001, market rates turned sharply lower; the decline in credit card rates raised the demand for credit card debt. Finally, households have increased their use of credit cards as a convenient means of paying for daily purchases.

The article also considers these findings in relation to the possible economic implications of the rise in the revolving credit FOR.
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Report on the Condition of the U.S. Banking Industry: Second Quarter, 2005
Assets of reporting bank holding companies rose $235 billion in the second quarter, to $10.9 trillion, 2.2 percent higher than in the first quarter, with loan growth accounting for almost 70 percent of this expansion. The strong increase in loans occurred mainly in mortgage-related categories, both residential and commercial, and in commercial and industrial loans. A sizable portion of the growth in residential mortgage loans at some institutions was in adjustable-rate mortgages (ARMs), especially nontraditional products such as option-ARMs. Securities and money market assets increased 0.8 percent, much less rapidly than loans. Borrowings funded a large portion of the growth in total assets.

Shareholders' equity at reporting bank holding companies rose 3.3 percent ($29.5 billion), outpacing the rate of growth in total assets. Notwithstanding small changes during the quarter, regulatory capital ratios overall remained strong for the industry. Credit quality continued to improve, as nonperforming assets fell to a remarkably low 0.71 percent of loans and related assets, a reduction of 5 basis points from the first quarter. Earnings totaled $32.7 billion for the second quarter, a little lower than in the previous period despite an increase of $1.2 billion in investment securities gains.
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Press releases and Board staff changes for the previous quarter.
Full text (95 KB PDF)

Legal Developments
Various bank holding company, bank service corporation, and bank merger orders.
Full text (157 KB PDF)

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Last update: January 3, 2006