Trump credit card rate cap has unclear path, ‘devastating’ risks

Bank executives were in a frenzy over the weekend after President Donald Trump announced late Friday that American credit card companies would be subject to a 10% cap on the interest rate they can charge customers.

The move includes shares of major banks citigroup, JPMorgan Chase, Wells Fargo And Bank of America It fell between 1% and 4% in premarket trading on Monday. Companies more closely tied to the card industry Visa, MasterCard And American Expressalso fell. Capital OneThe company, whose loan book consists mostly of credit cards, lost 7% of its value in pre-market trading.

Trump has proposed a one-year cap on interest rates starting January 20. While it’s unclear exactly how this will be implemented, the industry’s message is clear: The plan will have unintended consequences for consumers and the American economy.

According to banks and analysts, this move will make a large part of the credit card industry unprofitable, especially due to customers with less than ideal credit profiles. It is stated that the industry will stop offering customers access to subprime loans, instead offering loss-making products to consumers, and will make a number of other changes around card programs, including reducing rewards.

Consumers say they will either spend less or rely on other types of unsecured debt, many of which carry even higher interest rates than credit cards.

“We cannot offer our products at a loss; there is no scenario where we will increase our entire portfolio to 10%,” said one person with knowledge of the operations of a large bank who asked to remain anonymous to speak openly. “It is not an exaggeration to suggest that this will collapse the economy very quickly.”

11 research note, KBW analysts led by Sanjay Sakhrani and Chris McGratty said in a Jan. 11 research note that the negative impact on the economy from less spending could be more severe for airlines, retailers and restaurants, which will have to make up for losses in card revenue by “potentially increasing the prices” of their services.

The industry’s trade groups issued a joint statement explaining the situation late Friday.

“Evidence shows that a 10 percent interest rate cap would reduce credit availability and be devastating to the millions of American families and small business owners who rely on and value credit cards—the consumers this proposal is intended to help,” the trade groups said.

While this bill is pending in Congress, to work A look at the Missouri market from the Electronic Payments Coalition found that a 10% cap on rates would mean more than 80% of card accounts would lose access. The research claimed that most accounts with credit scores below 740 will be closed.

Making things even more complicated is that it’s unclear to bankers how Trump’s interest rate cap will materialize.

The simplest approach through legislation in Congress is not possible by the proposed Jan. 20 start date, according to the spokesperson. Tobin Marcushead of US policy at Wolfe Research.

Other enforcement tools are possible through banking regulators, including the Consumer Financial Protection Bureau. But the Trump administration has repeatedly tried to shut down the agency, and the industry has had a successful track record of violating CFPB rules through the courts.

“I’m not aware of any authority they could use to do this unilaterally in any comprehensive way,” Marcus said. “As far as I can tell, telling them they have until January 20th is an attempt to put pressure on them to do it voluntarily.”

Card issuers now face the risk of interest rates falling further through some kind of compromise negotiated with the government, though the exact mechanism Trump could use to implement a 10 percent interest rate cap is unclear, KBW’s McGratty said in an interview.

“Is 10% an opening bid?” he said. “There’s a long way between 10 percent and what companies charge today.”

According to data from the Federal Reserve Bank of New York, Americans had a total of $1.23 trillion in credit card debt as of the third quarter of last year. Balances are rising as many Americans spend their savings accumulated during the global coronavirus pandemic.

Correction: This story has been updated to correct Capital One’s spelling.