Summary
This program will be a benefit for the large credit card issuers: JP Morgan Chase, Citicorp, Bank of America, American Express, Discover and Capitol One, all of whom can position themselves as a high quality, AAA rated, source of new loans. TALF could prove to be especially helpful to American Express, Discover and Capital One, credit card issuers who lack the branch network and deposit base of the big money center banks. TALF could open up a funding source by reviving the credit card securitization market.
Analysis
TALF - Implications for Credit Card Issuers
The Term Asset-Backed Securities Loan Facility (TALF) was launched on March 3rd. It is intended to rejuvenate the securitization market for asset-backed loans (ABS) and jump start the market for consumer loans such as credit card, auto and student loans. The first applications for TALF will be accepted on March 17, and the first three-year loans will be granted starting March 25.
A key element of the TALF is the requirement for an AAA rated credit. ABS loans under TALF must be AAA rated. There is some debate about what AAA rated is, but for credit card loans it is to require credit card issuers to set high credit standards, prime consumers with 700 plus FICO scores. The products offered will need to have competitive, low finance charge rates and attractive payment terms to attract the higher quality consumer borrower. Examples are low rates with a deferred billing plan, or offers of 0% financing for a limited time combined with reward programs. Issuers will look to higher interchange rates / merchant discounts from merchants to help finance the rewards, deferred billing or low interest rate plans.
Issuers can strengthen their case for AAA rated credit with a well documented and aggressive credit decisioning program. This refers to how they will actively managed credit lines, late payments, over line accounts on an ongoing basis. They will want to demonstrate that they will be able to quickly identify and work with accounts that are delinquent or are likely to go delinquent.
This program will be a benefit for the large credit card issuers: JP Morgan Chase, Citigroup, Bank of America, Capital One, American Express and Discover all of whom can position themselves as a high quality source of new loans than can be packaged into tranches of TALF backed ABS loans sold to the Federal Reserve Bank of New York.
TALF could prove to be especially helpful for Capital One, American Express and Discover, credit card issuers who do not have the branch network and consumer deposit base that the big banks have. For that reason Capital One, American Express and Discover are more likely to be active in the TALF. These three issuers suffered an increase in funding costs last year when credit markets froze. These three companies have all become bank holding companies to get access to government funding.
That is my interpretation of TALF. The more critical TALF interpretation is that of the major card issuers. How do they view TALF? Will this trigger new credit card loan origination? If yes, then we have a gain for the credit markets and that is good for consumers and business.
