We have been barraged with news over the past 18 months about toxic assets. These are the same assets that single-handily took down financial giants such as Bear Stearns and Lehman Brothers, both of which had been in business for more than 100 years. Savings and Loan Institutions like Washington Mutual, the nation’s largest, also went under as a result of toxic assets. Most of the toxic assets that have hurt banks to this point have been tied to mortgages. The next waves of bad assets that banks might be sitting on are credit card loans to customers.

The banks making the most headlines today because of the uncertainty of the value of assets on their balance sheet are also the banks that stand to suffer the most as more credit card holders default on payments. Citigroup, Bank Of America, and JP Morgan Chase are the issuers on $46 billion of the $76 billion in credit card loans that were extended in 2008. In other words, these three banks represent more than 60% of the credit card market today. Overall, there is over $1 trillion worth of credit card debt in this country.

The biggest challenge for these banks is to determine how much money they should set aside to make up for the credit card bills that go unpaid. In December, the industry “charged-off” 7.73% of outstanding balances, meaning that they feel that nearly 8% of outstanding credit card balances are unlikely to be collected. This number will surely increase as unemployment rises, as it has been doing dramatically every month. Historically, charge-offs have generally stayed about 1% above the unemployment rate.

Banks are dependant on the revenues generated from their credit card businesses, so while the next year could be difficult if the economy doesn’t rebound in a meaningful way, we shouldn’t see any of the big players in the credit card industry looking for a way out. Still, expect card issuers to be more flexible than ever in working with cardholders to pay off outstanding balances.

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Tags: Bank Of America. credit cards, Bear Stearns, Citigroup, JP Morgan Chase, Lehman Brothers, Loans

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