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

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

The move sent big bank stocks including… Citigroup, JPMorgan Chase, Wells Fargo and Bank of America A decrease of between 1% and 4% in pre-sales trading on Monday. Companies closely linked to the card industry, e.g Visa, MasterCard and American Expressalso fell. Capitol Onewhose loan book consists mostly of credit cards, was down 7% in pre-market trading.

Trump proposed capping interest rates for one year starting January 20. While it is unclear exactly how this will be implemented, the industry message is clear: the plan will lead to unintended consequences for consumers and the American economy.

The move would make large segments of the credit card industry unprofitable, especially those associated with customers with less than ideal credit files, according to banks and analysts. Instead of offering loss-making products to consumers, the industry will simply stop offering access to customers with high-risk credit, insiders say, along with a slew of other changes around card programs including cutting back on rewards.

They say consumers will either spend less or rely on other forms of unsecured debt.

“We cannot offer products at a loss; there is no scenario where we take our entire portfolio to 10%,” said a person familiar with the operations of a large bank, who requested anonymity to speak frankly. “It is not an exaggeration to suggest that this will destroy the economy very quickly.”

Industry trade groups issued a joint statement late Friday to make their case.

“Evidence suggests that capping interest rates at 10% would reduce the availability of credit and be devastating to millions of American families and small business owners who depend on and value their credit cards, the very consumers this proposal is intended to help,” the trade groups said.

What makes matters more complicated is that it is not clear to bankers how the interest rate ceiling approved by Trump will be implemented. A clearer approach, through legislation in Congress, is not possible by the proposed January 20 start date, said Tobin Marcus, head of US policy at Wolf Research..

Other enforcement methods may also be used, through banking regulators, including the Consumer Financial Protection Bureau. But the Trump administration has repeatedly tried to shut down that agency, and the industry has successfully defeated the CFPB’s rules through the courts.

“I’m not aware of an authority they can use to do this unilaterally in any comprehensive way,” Marcos said.

“As far as I know, telling them that they have until January 20 is an attempt to put pressure and make them do it voluntarily,” he said.

This story is evolving. Please check back for updates.