After U.S. President Donald Trump released a "10% annual cap on credit card interest rates," the U.S. financial market was caught in a rough whirlpool. On the 9th, Trump said on social media that "we will no longer tolerate credit card companies exploiting Americans by charging high interest of more than 20% to 30% a year," and released that he would set the cap at 10% annually.
The stated aim is to ease the burden on low- and middle-income household finances, but the financial sector is warning of revenue destruction and the return of crisis. The stock market fell, led by bank shares. The bond market also froze rapidly. A fear similar to that of the 2008 financial crisis is spreading.
◇ Bank and card stocks' "Black 13th"... trillions of won in market cap wiped out
On the 13th (local time), major financial stocks in New York trading posted record plunges. Uncertainty that followed Trump's release on the 9th turned into a selloff that day. Investors fear that if the move goes beyond mere verbal intervention and leads to an actual executive order or legislation, the financial sector's revenue model itself could disappear.
JPMorgan Chase, the largest U.S. bank, closed at $310.77, down 4.23% from the previous day. Over the past five days, JPMorgan Chase shares have fallen more than 6%. Core payment network corporations Visa and Mastercard also dropped more than 8% and 5%, respectively, over the past five days, fully reflecting the market shock.
The blow to small and midsize financial firms with a high share of the credit card business was even more fatal. Capital One plunged 7.6% in a single day on the 13th, and Synchrony Financial also posted a record drop of 10.1%. The loan portfolios of these two financial firms are concentrated in credit cards. If the cap becomes reality, they will have to shoulder both a decrease in interest revenue and arrears risk. Investors, predicting that if rate controls take effect, such small and midsize financial firms are more likely than large banks to first face a contraction in credit supply and worsening results, moved to sell.
◇ $70 billion bond market "nervous system paralysis"... will the 2008 nightmare return
An even more serious warning than in the stock market is sounding in the roughly $70 billion (about 103 trillion won) credit card asset-backed securities (ABS) bond market. Credit card ABS are bonds made by bundling the debt people put on their cards. Investors buy these bonds trusting the interest that card users will pay. The key safety device that supports this market is the cushion called "excess spread." It refers to the surplus left after subtracting the interest to be paid to bond investors and operating expenses from the interest that card companies collect from users. When arrears occur or losses arise, it serves as a kind of airbag that absorbs the shock.
Currently, the excess spread in the U.S. credit card ABS market is about 18%. But if the cap is bound at 10%, this figure is expected to plummet to 1.8%. JPMorgan argued in an analysis report that "cutting credit card interest rates is tantamount to removing the safety devices the financial system has."
The financial industry predicted that even without a sharp rise in the delinquency rate, the mere disappearance of the buffer zone would lower bond credit ratings and likely trigger a mass investor exodus. Some predicted a situation similar to the mortgage-backed securities (MBS) bust during the 2008 financial crisis. When the buffer to prevent deterioration in the underlying asset disappeared at that time, MBS ratings were downgraded one after another, which soon led to a global financial paralysis.
Daniel Schaefer, a trader at Academy Securities, said in a Bloomberg interview that "if a cap is introduced, countless borrowers currently paying 10% to 30% interest will inevitably be pushed out of the market," and that "bond investors will halt credit card ABS transactions or take an extremely cautious stance until the uncertainty is resolved."
◇ Political calculus and reality diverge... "A policy for ordinary people will hurt them"
Trump is calculating that, ahead of the midterm elections in Nov., he can win public sentiment by messaging that he will tackle the sharply rising cost-of-living squeeze. The average U.S. credit card interest rate is currently around 21% to 25% annually. Some department store or retailer-only cards exceed 31% annually. Compared with the U.K. (about 21%) or Canada (about 20%), it is more than 10 percentage points higher.
But the financial sector argued that the move would paradoxically result in pushing low-credit, low-income people out of the market. If the 10% cap becomes reality, the first phenomenon will be a "credit cliff." When the risk of not getting repaid (default risk) rises, banks charge higher interest to cover losses. If they are forced to charge only up to 10% interest, banks have no reason to issue cards to high-risk, low-credit applicants.
In the end, low-credit ordinary people are likely to be driven out of the formal financial system and into illegal private lenders that charge a murderous rate of more than 400% annually, or into "payday loans (short-term usurious loans)" backed by wages as collateral. Some states, including Illinois and Arkansas, previously implemented rate caps, but cases in which credit supply to low-income groups shrank sharply back this up.
Wells Fargo said in a recent report that "a 10% annual rate cannot cover the default risk of low-credit borrowers," and analyzed that "banks will completely halt issuing cards to ordinary people to avoid losses." The warning is that a policy intended to lower interest and ease burdens will instead trigger a "credit disappearance" phenomenon, in which ordinary people in need of quick cash lose access to credit and are driven to illegal private lenders.
Jeremy Barnum, chief financial officer (CFO) of JPMorgan Chase, warned at a fourth-quarter earnings release on the 13th that "a rate cap will not benefit consumers but could cause serious side effects across the economy." Barnum said, "In particular, ordinary people with low credit scores will broadly lose access to credit," and criticized the move as "undermining the basic principles of managing financial system risk."
◇ Legislative hurdles and uncertainty... market watches "Trump risk"
Many observers also say it will be difficult in practice to implement a 10% rate cap immediately. The U.S. president lacks the legal authority to force market interest by executive order alone. Congressional legislation or regulatory procedures are needed, but there is no small amount of skepticism even within the ruling Republican Party. House Speaker Mike Johnson said, "There is no need to get too excited too quickly about new policies," taking a cautious stance.
Financial market experts focused more on the fact that Trump continues to make remarks that disturb market order than on whether the plan will actually be implemented. The Washington Post (WP) said in an editorial that "a president trying to swing the market with a single social media post undermines the predictability that American capitalism relies on."