In July 2023, the U.S. banking agencies proposed a new capital charge for the unused portion of consumer credit card lines, as part of the Basel III Endgame package. The proposal introduced a new 10-percent Credit Conversion Factor (CCF), which functions largely as a risk weight applied to the unused credit line amount. Although this element is part of the Basel agreement, its U.S. implementation could have a uniquely major effect given the fact that about 80 percent of available credit among U.S. bank credit card lines are currently unused.[1] This note elaborates on how the CCF is calibrated to overstate risk and demonstrates that with this overstatement, consumers across all income ranges would be vulnerable to significant credit line reductions, especially on accounts on which they do not revolve balances. The latter analysis is carried out using a new, robust dataset comprising 1 million credit card consumers.
As detailed in a previous BPI post and expanded on later in this post, the proposed 10 percent CCF overstates the credit risk of such unused lines and would increase the cost for banks to maintain credit card lines that are infrequently or lightly used. As a result, banks would be incentivized to reduce credit limits or possibly close these accounts. This could be detrimental to the financial well-being of households, especially those with low to moderate incomes. These households often depend on the unused portion of their credit card lines as a critical source of backup liquidity when facing unexpected expenses such as medical bills.
Furthermore, a reduction in a consumer’s credit line would increase that consumer’s credit utilization rate, which is the ratio of the credit card balance to the credit limit. A higher credit utilization rate often reduces a consumer’s credit score. Consequently, the proposed capital charge could indirectly harm consumers’ credit scores, making it more difficult for them to access credit in the future.
This post presents an initial analysis of credit card utilization patterns, focusing on consumers’ vulnerability to decreased credit lines by income range and account activity history. The analysis reveals that around half of credit card lines are issued to credit card accounts that are paid off in full every month (Transactors) and that credit card line utilization rates are relatively low for these accounts. Credit card utilization rates are low for Transactor accounts in all income groups, including low- and middle-income consumers who, on average, use less than 30 percent of their available total credit line. As a result, the repercussions of banks’ increased costs from the proposed new risk weight would not be limited to higher-income consumers.
These results support implementing a lower CCF for all Transactor accounts, especially since the proposed rule already assigns differential risk weights to Revolver and Transactor accounts, acknowledging that the latter are lower-risk. A reduced CCF is further justified because the 10 percent CCF contained in the U.S. proposal (and the Basel standard) is not supported by relevant public data or analysis. As documented in the previous BPI blog post, it is about double the amount suggested by historical loss experience for this risk parameter, even before considering how the annual stress tests in the United States already account for stress exposure-at-default.
Given these findings, the agencies must carefully consider the potential consequences of this new capital charge before reaching a final decision on its calibration. Further research is necessary to assess how extensively consumers may lose access to the low-utilization accounts they use to manage their monthly finances and meet liquidity needs. In particular, we need to determine the extent to which consumers who have revolving balances also have low utilization rates, leaving them at risk of line reductions under the proposal, and whether additional steps are needed to mitigate that risk.