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Reserves for Credit Losses
 6 Months Ended
Jun. 30, 2020
Reserves for Credit Losses [Abstract]  
Reserve for Credit Losses Reserves for Credit Losses
American Express has in place an enterprise-wide credit risk management process and manages the overall credit risk exposure associated with the Card Member receivables and loans, including those purchased by Credco. Reserves for credit losses represent management’s best estimate of the expected credit losses in its outstanding portfolio of Card Member receivables and Card Member loans, as of the balance sheet date. The CECL methodology, which became effective January 1, 2020, requires management to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period (R&S Period) beyond the balance sheet date. Management makes various judgments combined with historical loss experience to calculate a reserve rate that is applied to the outstanding loan or receivable balance to produce a reserve for expected credit losses.
American Express uses a combination of statistically-based models that incorporate current and future economic conditions throughout the R&S Period. The process of estimating expected credit losses is based on several key models: Probability of Default (PD), Exposure at Default (EAD), and future recoveries for each month of the R&S Period. Beyond the R&S Period, American Express estimates expected credit losses using its historical loss rates.
•PD models are used to estimate the likelihood an account will be written-off.
•EAD models are used to estimate the balance of an account at the time of write-off. This includes balances less expected repayments based on historical payment and revolve behavior, which vary by customer. Due to the nature of revolving loan portfolios, the EAD models are complex and involve assumptions regarding the relationship between future spend and payment behaviors.
•Recovery models are used to estimate amounts that are expected to be received from Card Members after default occurs, typically as a result of collection efforts. Future recoveries are estimated taking into consideration the time of default, time elapsed since default and macroeconomic conditions.
American Express also considers the likelihood a previously written off account will be recovered. This calculation is dependent on how long ago the account was written off and future economic conditions, which estimate the likelihood and magnitude of recovery. American Express models are developed using historical loss experience covering the economic cycle and consider the impact of account characteristics on expected losses.
Future economic conditions include multiple macroeconomic scenarios provided to American Express by an independent third party and reviewed by management. These macroeconomic scenarios contain certain geographic based variables that are influential to its modelling process, including unemployment rates and real gross domestic product. The process of estimating credit reserves incorporates the above factors over the R&S Period explicitly considering macroeconomic forward-looking information.
Additionally, management considers whether to adjust the quantitative reserves to address possible limitations within the models or factors not included within the models, such as external factors, portfolio trends or management risk actions.
Lifetime losses for most Card Member receivables and Card Member loans are evaluated at an appropriate level of granularity, including assessment on a pooled basis where financial assets share similar risk characteristics, such as past spend and remittance behaviors, credit bureau scores where available, delinquency status, tenure of balance outstanding, amongst others. Credit losses on accrued interest are measured and presented as part of Reserves for credit losses on the Consolidated Balance Sheets and within the Provisions for credit losses in the Consolidated Statements of Income, rather than reversing interest income.
Card Member receivables and Card Member loans balances are written off when management considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due for pay in full or revolving loans. Card Member receivables and Card Member loans in bankruptcy or owed by deceased individuals are generally written off upon notification.
Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
Changes in Card Member Receivables Reserve for Credit Losses
Card Member receivables reserve for credit losses increased for the six months ended June 30, 2020, primarily driven by higher reserve builds reflecting the continued deterioration of the estimated global macroeconomic outlook, including higher rates of unemployment and Gross Domestic Product (GDP) contraction, partially offset by a decline in volume.
The following table presents changes in the Card Member receivables reserve for credit losses for the six months ended June 30:
(Millions)20202019
Balance, January 1 (a)
$15  $167  
Provisions (b)
264  108  
Net write-offs (c)
(101) (111) 
Other adjustments (d)
6  8  
Balance, June 30$184  $172  
(a)Includes a decrease of $147 million as of January 1, 2020, related to the adoption of the CECL methodology.
(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(c)Net of recoveries of $38 million and $64 million for the six months ended June 30, 2020 and 2019, respectively.
(d)For June 30, 2020, primarily includes reserve adjustments related to the removal of U.S. Consumer and Small Business Card Member receivables of $7.2 billion from the Charge Trust and for June 30, 2019, primarily includes reserve balances related to new groups of, and participation interests in, Card Member receivables purchased from affiliates, totaling $2.7 billion and participation interests in Card Member receivables sold to an affiliate totaled $1.1 billion.
Changes in Card Member Loans Reserve for Credit Losses
Card Member loans reserve for credit losses increased for the six months ended June 30, 2020, primarily driven by higher reserve builds reflecting the continued deterioration of the estimated global macroeconomic outlook, including higher rates of unemployment and GDP contraction and changes in portfolio mix, partially offset by a decline in volume.
The following table presents changes in the Card Member loans reserve for credit losses for the six months ended June 30:
(Millions)20202019
Balance, January 1 (a)
$17  $5  
Provisions (b)
12  6  
Net write-offs (c)
(6) (4) 
Balance, June 30$23  $7  
(a)Includes an increase of $7 million as of January 1, 2020, related to the adoption of the CECL methodology.
(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(c)Net of recoveries of $1.0 million for both the six months ended June 30, 2020 and 2019.