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As the credit market heats back up due to the growing consumer demand amid the reopening, America’s third-largest bank, Wells Fargo, unexpectedly announced this week that it will permanently shut down all of its existing lines of credit – a very popular product provided by the retail-focused Wall Street giant – and the move is already infuriating a legion of customers. The revolving credit lines that are about to be discontinued in the coming weeks typically allowed customers to borrow from $3K to $100k. When they were launched in the first place, the bank’s goal was to offer users a way to consolidate higher-interest credit-card debt, pay for home renovations or avoid overdraft fees on checking accounts attached to the loan. In a statement released on Thursday, the bank said the decision came as an effort to simplify their product offerings, so they chose to no longer offer personal lines of credit as the bank feels it can better meet the borrowing needs of their customers through credit card and personal loan products.
Another major disruption caused by the sudden shutdowns is that many customers will be left without what may be considered as a critical source of liquidity. Even though the bank didn’t reveal how many customers used the credit lines it is eliminating, recent data showed that Wells Fargo had had $24.9 billion in loans in a category called “other consumer” as of March, and that category was 26% lower this year than during the same period last year.
Many of the users of the credit lines that are shuttering will actually be the ones penalized by the bank’s decision. According to the CNBC report, it will get much harder for the customers whose credit lines will be involuntarily closed to receive credit from a new source because their FICO scores will be penalized as if they had elected to close the credit line willingly. Economists have been advising users to stop making withdrawals and turn their attention to repayment to avoid disruptions in their credit scores. According to one CNBC analyst, “once the account is closed and you can no longer draw from it, your annual percentage rate will be frozen and that’s the rate you’ll pay on the remaining balance”.
In essence, the move is Wells Fargo’s latest in a series of lending products closures. In 2020, the bank announced it would no longer provide home equity lines of credit for its customers and that it would stop giving auto loans to most independent car dealerships. Back then, financial analysts argued that happened because the bank was having a hard time making enough money to keep these areas going since the Federal Reserve placed penalties and growth limits on its business.
The last time Wells restricted consumer credit was because of the mounting uncertainty about the remaining purchasing power of the American consumer amid what was the worst economic recession facing the United States since the Great Depression of the 1930s. But that uncertainty pretty much vanished ever since trillions of dollars in federal stimulus money were pumped into the financial markets, and fueled several asset bubbles and an unprecedented boom in both stock and housing markets. That’s why the timing of this latest decision is sparking so much curiosity amongst financial experts.
It seems that the bank is engaging in some prudent risk-management as it could already realize that the U.S. economy is on the edge of an inflationary collapse that will likely force the Fed to hike interest rates much sooner than expected. As Wells Fargo tries to restructure its operations and takes cautionary measures to prevent future losses, the bank’s move says more about our overheating economy and a bleak outlook for the reopening than many can realize. Those who have previously seen warning signs indicating that a catastrophic financial crisis was approaching already know that they have to run for the exits before the whole system starts melting down while triggering huge losses and acute financial imbalances. One thing is certain: when big banks suddenly start to close down their credit lines is because they can see that trouble is ahead.