A populist proposal has sent a chill through the US financial sector just as earnings season kicks off.
Financial stocks sold off sharply on Monday after President-elect Trump called for a temporary 10% cap on credit card interest rates (down from the current ~21% average) starting January 20th to combat cost-of-living pressures.
📉 THE MARKET REACTION: While the broad sector dipped, the pain was concentrated in firms most reliant on consumer credit margins:
- The “Pure-Play” Crash: Synchrony, Bread Financial, and Capital One plummeted between 8% and 11%.
- The Universal Banks: Citigroup (-3.7%), JPMorgan (-2.5%), and Bank of America (-1.6%) saw more modest declines due to diversified revenue streams.
- The Networks: Amex (-3.8%), Visa/Mastercard (-1.8%).
🏛️ THE REALITY CHECK: Wall Street analysts are skeptical this can actually happen.
- UBS Global: Notes that such a cap would likely require an Act of Congress, as an Executive Order would face immediate and “overwhelming legal challenges.”
- The Precedent: Price controls on interest rates are historically rare and difficult to enforce federally without legislative backing.
⚠️ THE “UNINTENDED CONSEQUENCES”: Analysts warn that a hard cap would likely harm the very consumers it aims to help.
- Credit Crunch: J.P. Morgan warns banks would immediately slash credit limits or close accounts for lower-score borrowers to mitigate risk.
- Shadow Banking: Borrowing demand could shift to unregulated or higher-cost alternatives (pawn shops, payday lenders).
💡 ANALYST TAKEAWAY: The market is pricing in “Headline Risk” rather than “Legislative Risk.” While the 10% cap is unlikely to pass Congress, the rhetoric puts management teams in the hot seat just as JPMorgan kicks off earnings tomorrow. Expect Q4 guidance to be overshadowed by questions on Net Interest Margin (NIM) sensitivity and credit box tightening.
👇 Bankers & Policy Wonks: Is this a serious policy proposal, or just a negotiation tactic to force banks to lower rates voluntarily?