Credit card weakness a vicious cycle for lenders

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - Efforts by large U.S. credit card issuers to gird for historically high customer defaults may actually make the global credit crisis worse.

A seizure of global credit markets has left issuers unable to sell to investors the loans they make. This means issuers must be extra sure that when they extend credit, they do so carefully.

But even better credit control might not stave off the damage, with economies worldwide under pressure and unemployment heading higher, as banks tighten lending.

This deterioration comes on the heels of more than half a trillion dollars of writeoffs of subprime mortgages and other debt industrywide since the credit crunch began last year.

"We, as an industry, may end up with possibly the highest credit card losses the industry has ever experienced," Bank of America Corp (BAC.N) Chief Executive Kenneth Lewis said in Detroit this week.

The desire to thaw credit markets and boost lending is the reason the U.S. Treasury Department threw hundreds of billions of taxpayer dollars at Bank of America, JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Capital One Financial Corp (COF.N) and other lenders to strengthen their balance sheets.

Even American Express Co (AXP.N), with just $11.9 billion (7.9 billion pounds) of customer deposits, decided to become a bank holding company so it could get some of this new capital.

While banks are growing more comfortable lending to each other, they are demonstrating no such confidence in consumers.