The Banking and Finance Review

Macroeconomic Indicators of the U.S Credit Card Charge-off Rate

Leo-Rey Gordon, Keith Pettiford

Abstract


The identification and monitoring of macroeconomic indicators of charge-off rates is essential in loan loss reserve allocation and more generally bank risk management. The empirical literature provides contradicting evidence on the significant macroeconomic indicators of charge-offs. The paper shows that the trend in the credit-card charge-off rate shows variability over time coupled with extreme swings in the most recent periods. The paper then argues that failure to account for the inherent volatility in charge-off rates will lead to inconsistent guidance on its key indicators. The paper demonstrates the usefulness of Autoregressive Conditional Heteroscedastic (ARCH) methods when accounting for the time-varying volatility of charge-offs. Once ARCH effects are controlled for the key macroeconomic indicators demonstrating a causal link to the charge-off rate are identified. The paper also demonstrates that there has been a fundamental change in the association of the key indicators with charge-off rates in recent times.


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