President Trump's proposed 10% cap on credit card interest rates sounded like a win for consumers when the administration pitched it as populist relief. But this week, America's banking giants made it crystal clear they think the plan would blow up in everyone's face.
During fourth-quarter earnings calls, top executives from the nation's largest financial institutions issued stark warnings: impose that rate cap, and millions of Americans will find themselves locked out of credit entirely. Oh, and there might be an economic slowdown too.
The Basic Problem With Price Controls
Citigroup Inc. (C) outgoing CFO Mark Mason didn't mince words when reporters asked about the proposal on Wednesday. "An interest rate cap is not something that we would or could support, frankly," Mason said. He warned the mandate would "likely result in a significant slowdown in the economy."
Mason tried to soften the blow slightly, acknowledging that "affordability is clearly an important issue" and saying Citigroup "looks forward to collaborating with the administration" on alternative solutions. Translation: we hear you, but this ain't it.
Who Actually Loses Access?
JPMorgan Chase & Co. (JPM) CFO Jeremy Barnum laid out the mechanics of what would actually happen. Instead of making debt cheaper for everyone, the cap would simply make debt unavailable for the riskiest borrowers—precisely the people the policy is supposedly designed to help.
"What's actually simply going to happen is that the provision of the service will change dramatically," Barnum explained. "Specifically, people will lose access to credit, like on a very, very extensive and broad basis, especially the people who need it."
Barnum called the proposal a "severely negative consequence for consumers" and the national economy. His argument boils down to Economics 101: "Instead of lowering the price of credit, it will simply reduce the supply of credit."