Credit Card Debt Reporting, Non-Accrual Asset Holding Costs and Risk-Weighting

Hey, welcome to this week’s weekly Q & A. This week, we’ve got a couple of questions, mostly about the data. So let’s dive in. 

Going over the latest bank financials, so far, I don’t see any reporting for credit card debt. Is this something that only the major banks like B of A, Chase, Wells Fargo, etc., would report? Thanks for a great product. 

Thanks for your question. And thanks for the compliment. I’m going to take you in there and just have a look at this real quick. I’ll show you what’s inside BankProspector.

If we go over to banks, I go to “All banks.” And then we go to our consumer credit cards, and you can see for Q1 2021, there are 468 lenders with 30 to 89 day late consumer credit cards and then 276 with 90 plus day late consumer credit cards, and 75 with non-accrual. So that’s real late-stage stuff. They’ll probably get pennies on the dollar for that. 

That’s Q1. If I go to Q2, we’re currently in the middle of a reporting period. So during the month of July, all the lenders report, and they have until the end of the month to report for the previous quarter, with the exception of about the top 10 or so banks with international offices, who have an additional five days, so they’re wrapped up by August 5th. 

You can see right now that there’s only a handful coming in. Go over to consumer credit cards, and you can see there’s only 10 here, zero for non-accrual. That is because these reports are coming in right now. So every single day, multiple times a day, our servers go out, and they communicate with the government servers. Then we pull in that data. We take it all apart, and we put it in here. 

What you’ll find is that at the beginning of the month, there’s very light reporting; towards the end of the month, a whole bunch of lenders will report, and then it’ll all be done by August 5th. So the fifth of whatever month it is after the report month, of which July is one. 

If you want a more complete dataset, then you have to go back because this is virtual real-time data, meaning that what you’re seeing in here is up to date within 24 hours or less. So when we’re in a reporting month, it’s just impossible to have a complete dataset because it doesn’t exist. 

That is what’s happening with credit card debt or anything else when you’re looking at this little quarterly selector here; that will determine the whole rest of the view that you have on all of your pages where you’ve got your quarterly selector like that. Hope that makes sense.

Next question. 

How much does it cost a bank per dollar to hold onto a non-accrual asset? For example, if the bank has $1 of non-accrual, it costs them X cents to hold onto it. 

So it’s not really like that. If you want to learn more about how this all works, then – we do have some information about this, but where it doesn’t come down to impacting individual transactions, we really don’t have a lot. 

But the way non-accrual works and the way late loans work is that it’s risk-weighted assets. There are formulas, depending on the type of asset that it is and how late that it is, the risks will be weighted differently.

So the older and the worse off it is, the heavier it weighs on the books. That means that they have, depending on how late things are, loan loss provisions and allowance for loan and lease losses, both of which I talk about in Course One. That is a bucket of capital where they have to set this money aside, and it can’t be loaned. It has to be there to adjust for the risk that is increasing, which has a heavier weight from the non-accrual. So I can’t tell you that if there’s a dollar of non-accrual, then it’s going to cost you 10 cents to hold onto it. That’s not really how it works.

There’s two things at play. One is the bucket of reserve capital that they have to have that they can’t be lending out. And then there’s the opportunity costs because all that money that they have sitting aside that isn’t at play, that isn’t at risk, can’t be loaned. So they don’t make any money on it.

Don’t be too concerned with what the exact dollar is because that’s not really a formula that we can get. Instead, just remember that as their non-accruals creep up, that really adds additional weight to their risk-weighting, which demands additional reserve capital, which takes that capital off the street and means that they can’t loan it and can’t make any money with it.

I hope that this was helpful for you. Thanks for being a member. I can’t wait to get your questions next week.