New credit card rules will reduce consumer liquidity - analyst

Fri Dec 19, 2008 1:51pm GMT

Dec 19 (Reuters) - The new credit-card rules approved by U.S. regulators to curb unfair practices will reduce liquidity at a time when consumers need it the most, and in turn impact consumer spending, prominent banking analyst Meredith Whitney said.

"The regulators believe they are actually doing what is best for the consumer... we argue that the unintended consequences of such actions will at least do a commensurate amount of harm to the economy by stifling consumer spending," the Oppenheimer & Co analyst wrote in a note to clients.

U.S. regulators on Thursday approved new rules to curb unfair credit card practices such as surprise fees and interest rate hikes. The rules are due to take effect on July 1, 2010. For details, please double-click [nN18354608]

Analyst Whitney said this regulation will reduce the current economics of the credit card industry to a level in which lenders will ultimately choose to provide fewer credit lines to fewer customers.

The inability to maintain pricing flexibility on unsecured loans will result in a "dramatic" reduction of risk taking and therefore credit lines outstanding, Whitney said.

"This line reduction will strain credit quality not just for credit card loans but for all consumer loans," she added.

Whitney said more than 70 percent of U.S. households have credit cards and that 90 percent of those households use cards as a cash flow management vehicle.

"We view the credit card as the second key source of consumer liquidity, the first being their jobs," Whitney said.

"Pulling credit at a time when job losses are increasing by over 50 percent year on year in most key states is a dangerous and unprecedented combination," she added.

The analyst expects lenders to pull back well over $2 trillion of lines over the next 18 months as a result of risk aversion, funding challenges and the just finalized regulatory changes.

This means available consumer liquidity in the form of credit card lines is expected to decline by 45 percent over the same period, Whitney said.

Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.

(Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by Tenzin Pema)

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