Credit Card Interest Rate Cap Raises Concerns for Banks

SadaNews - Anxiety is rising within the U.S. banking sector as the debate resurfaces regarding a cap on credit card interest rates, following U.S. President Donald Trump’s call to reduce them to 10 percent for one year. This step has reopened a sensitive file that touches on one of the most stable and profitable sources for banks, significantly impacting consumer spending.

This call puts bank stocks and lending institutions under clear pressure amid fears of eroding profit margins, disrupting risk pricing mechanisms, and tightening credit conditions, especially as a wide segment of American consumers rely on credit cards as a key driver of spending.

These developments raise broader questions about potential economic and regulatory implications, as well as the ability of the U.S. administration and Congress to push such a direction forward, especially at a time when experts warn that intervening in interest rate pricing could have adverse effects extending from the banking sector to the growth of the U.S. economy as a whole.

Banks and financial institutions have expressed concern since President Trump announced on social media Friday night his call for a 10 percent cap on credit card interest rates for one year.

These fees represent a major source of profit for card issuers, who have struggled for decades against any legislative attempts to limit them.

However, according to a report by The New York Times, President Trump’s call seems more like a wish than a mandate; there’s no clear path for his administration to unilaterally enforce an interest cap, and Congress has shown little interest in responding to his request.

Bank leaders and lobby groups in the sector are avoiding the topic, trying to steer clear of publicly criticizing the president’s decree, while secretly insisting that it would lead to adverse outcomes by limiting consumers’ access to credit, according to the report.

Nevertheless, bank stocks have sharply declined this week, especially those with substantial credit card businesses, such as Capital One.

Direct Consequences

Additionally, Michel Sleibi, Head of Financial Markets at FXPro, told "Sky News Arabia Economy":

It is natural for American banks to feel heightened concern regarding these proposals, particularly those related to imposing a cap on credit card interest rates.

This anxiety is linked to direct consequences on bank profitability, risk management, and consumer credit stability.

The first and most notable effect is the direct pressure on bank profits.

Credit cards are among the highest sources of income for American banks, with interest rates historically ranging between 20 and 25 percent.

Reducing these rates to about 10 percent means a sharp decline in profit margins, which will be reflected in a significant drop in revenues.

Sleibi adds that credit cards are often issued to high-risk segments, noting that the reduced yield will weaken banks’ ability to offset potential losses from delinquencies, thereby increasing operational and credit risks. He emphasizes that high interest rates do not just represent profit but are also a fundamental tool for pricing risks.

He points out that with a price ceiling imposed on interest, it becomes difficult to price risks associated with customers of poor creditworthiness, which increases the likelihood of unrecoverable losses. He adds that this reality may drive banks to tighten lending standards, reduce card issuance, or even withdraw from certain categories of credit products.

He also notes that the third effect is restricting access to credit for low-income households, explaining that these policies, contrary to their stated objectives, may lead to an increase in denied credit card applications for individuals with limited incomes or poor credit histories. He continues that this could drive some consumers to resort to non-banking funding channels that are more expensive and riskier, which would widen the credit gap instead of narrowing it.

Sleibi adds that intervening in interest pricing might distort market pricing mechanisms, noting that banks see the necessity for interest pricing to reflect the cost of funds, risk levels, and regulatory capital requirements. He asserts that such intervention could leave long-term impacts on the credit market and limit innovation in credit products.

He concludes by indicating that amid increasing regulatory tightening and higher capital requirements, combined with potential economic pressures throughout this year, concerns about regulatory and systemic risks that may threaten the stability of the financial sector overall are surfacing.

Reduction of Credit Lines

Banks state that if lending profitability decreases, they will be forced to cut credit lines and limit their credit card offerings.

Jamie Dimon, CEO of JPMorgan Chase, which holds the largest share of outstanding balances in the country, stated that capping interest rates "might not be a good idea." He added, "This would lead to increased inflation expectations and possibly higher interest rates over time."

Legal and financial experts believe that imposing a federal cap on credit card interest rates will likely require intervention from Congress, and so far, there are no indications of interest from Republican leaders in this regard.

House Speaker Mike Johnson downplayed the president's plan, stating it could have "a negative impact on many" as credit card companies might choose to cut credit to certain consumers.

However, if the White House takes legislative action, there is some bipartisan support in Congress, according to The New York Times.

Sens. Bernie Sanders from Vermont and Josh Hawley from Missouri introduced a bill last year to set a cap on fees at 10 percent for several years. Lacking the President’s support, the bill stumbled, but there is potential for its revival.

On Monday, Sen. Elizabeth Warren from Massachusetts spoke about her economic vision for the Democratic Party. Shortly thereafter, the president reached out to her to discuss his desire to impose a cap on credit card interest rates.

Clear Concerns

Joe Yarak, Head of Global Markets at Cedra Markets, tells "Sky News Arabia Economy":

American banks are showing clear concern over any trend towards imposing a cap on credit card interest rates.

A significant portion of banks' revenues and profits fundamentally comes from this sector.

The average American consumer holds a considerable number of credit cards, and with high spending levels ranging between 1.5 and 2 trillion dollars, lowering the interest to around 10 percent could erode approximately 150 billion dollars from the profits of American banks.

This reality will push banks to resist any regulatory adjustments to these rates, particularly since current interest rates exceed 20 percent, representing one of the most significant avenues for high returns and relatively easy profits, given the strong credit guarantees favoring banks.

Yarak emphasizes that concerns are not limited to this sole action, but extend to the possibility that this step could be a precursor to a series of additional measures, akin to what occurred previously in the mortgage market and housing finance support programs.

He explains that any interest rate reduction in a monetary environment already trending towards low rates will narrow banks' profit margins, adversely affecting their investments and profitability in the medium and long term.

Conversely, he points out that the current U.S. administration seeks to support banks' main income sources, but capping interest on credit cards could limit consumer spending ability.

He continues that some consumers experiencing liquidity shortages may face delinquencies or bankruptcies, weakening banks' ability to cover these obligations and creating a double pressure loop on both consumers and banks.

Yarak concludes by stating that this path could lead to further slowdown in the U.S. economy, especially since the main driver of growth at this stage is strong consumer spending within the United States.