Major stocks of banks and credit cards in the U.S. showed considerable drops as a result of the announcement made by President Trump regarding a proposed ceiling of 10% for the credit card annual interest rate for a period of one year. This announcement was made through a social media site over the weekend and asserts the point that Americans are being “ripped off” at the present interest rates of between 20-30%.
The financial industry is facing market pressures because of the interest rate proposal
The stocks of Capital One declined by nearly 9% in pre-market trading on Monday as it got dragged down by the entire sector due to the possible implications of Trump’s rate cap proposal. Citigroup, JPMorgan, and Wells Fargo declined by nearly 4%, 3%, and 2%, respectively. Barclays and American Express declined by 2.5% and 4.4%, respectively. Visa and Mastercard declined by nearly 2%, dragging the entire sector down due to possible implications on the regulation of credit card pricing.
Invesco KBWB Bank ETF fell by 1.5%, due to overall nervousness in this sector regarding the possibility of new legislation that may negatively affect the business of credit card companies. Banking stocks have traditionally remained sensitive to threats of regulations regarding fee-income streams, and this new approach of the Trump administration is totally different from the market-driven pricing structure that had remained in place for the last few decades.
Implementation of the rate cap needs Congress
The crucial aspect that analysts at Raymond James highlighted is that President Trump does not have the ability to determine by himself the rate of interest that is to be applied to credit cards, meaning that Congress must act to make sure that the rule is effective throughout America. Analyst Ed Mills of Raymond James highlighted that there is a challenge to the new rule regarding legislation: “The legislative risk is relatively low, although clearly higher now that the President has expressed his view to his base.”
“While we believe there is a low chance of passage, we believe the biggest threat to the issuance of processors and, to a degree, the networks, is the rate cap,” Raymond James analysts wrote in their comprehensive analysis of the possible market effects of the proposed regulatory rule.
Alternative lending sites could be well served by the limitations that traditional banks face
For instance, Mizuho’s Dan Dolev highlighted that the 10% proposed limit by Trump would mean that the “buy now, pay later industry and personal lenders would see significant lending opportunity if banks decrease lending to those with lower FICO scores.”Affirm, Upstart, SoFi Technologies, Block, Inc., & PayPal would see an increase in demand due to the need for alternative lending options beyond banks.
Cap rates could have several unforeseen consequences for consumers
A spokesperson for the Credit card interest rate caps has been forecast to have counterintuitive effects on financial analysts, who feel that the banks will have to be more particular about their lending criteria because of the loss of the right to set their pricing structure according to the different groups of customers. The overall impact of this will be to reduce credit to high-risk debtors. The banks will probably argue that rate caps will “cut off credit to the same debtors that the President is trying to help.”
The banking sector is expected to raise stiff opposition if the proposal goes through, due to the negative effects that may be caused by the proposal on the supply of credits, as well as growth within the financial sector. The current average APR for credit cards within the US is estimated to be 20%, with over half of the population having a FICO score below 745, whereby the rate of interest for borrowing money is higher due to increased default risk variables.
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