Trump's credit-card cap would feed the weakest to the sharks

A month ago, President Donald Trump called complaints about affordability a hoax and a con-job perpetrated by Democrats. Now, he’s attacking businesses for ripping off Americans. The latest target of this naked cynicism is credit-card lenders, who are being told to cap interest rates at 10% for a year.

This is dumb policy that shouldn’t survive contact with the real world. But if it does, the most likely outcome would be a significant contraction in lending, especially to the riskiest borrowers with the fewest options to access credit. They’d be left with little option but to turn to more expensive and less regulated lenders. Trump would feed the most vulnerable to the worst sharks.

The president first posted on Friday evening that he would no longer let Americans be ripped off by card companies charging rates of 20% to 30%, blaming the last Democratic administration and signing off with a single word in all caps: "AFFORDABILITY!" On Sunday, he told reporters that lenders who didn’t cut their rates to 10% by Jan. 20 — the anniversary of his inauguration — would be "in violation of the law." It isn’t at all clear what law he’s talking about; nothing relevant currently exists, certainly at the federal level.

Still, given his disregard for rules of any kind, the threat alone put pressure on bank and card-company stocks Monday. Barclays PLC, the most exposed European lender, lost 3.5% in early trading, while in U.S. pre-market trading Capital One Financial Corp. and Synchrony Financial were down more than 10% and American Express Co. was down 5%. JPMorgan Chase & Co., one of the biggest U.S. card lenders, was also off by 3%.

For some lenders, the cap on rates would be extremely painful. It would wipe out earnings completely this year for dedicated card companies such as Capital One and Synchrony, according to Wells Fargo & Co. analyst Mike Mayo. More diversified big banks with large card businesses could see pretax profits drop by between 5% and 18%, Mayo added.

Lenders charge interest rates of about 22% on average — although riskier borrowers can pay significantly more, even above 30%. Costs have jumped in recent years as inflation sent Federal Reserve benchmarks soaring. But rates are higher than other forms of lending for two main reasons. Cards usually suffer the biggest losses as a proportion of loans during a downturn, especially when unemployment jumps; there’s no collateral for banks to recover, and people will often default on cards before other debts.

The other reason is that borrowers can repay debt entirely any time, so card lenders have no guarantee about what interest they will earn on balances. The business is hugely profitable for banks in good times and they fight hard for customers by using America’s high interchange fees, which are paid by retailers and other merchants, to fund complex reward programs. Lenders make the most money from high earners who spend regularly on cards but don’t pay off their balances every month.

Capping interest rates at 10% would hurt all aspects of card lending because profitable customers help make the business viable for all others. However, the biggest victims would be subprime cardholders, those most likely to get into repayment difficulties. The Bank Policy Institute, a lobby group, said that lenders would slash credit availability and drive consumers toward less regulated and costlier alternatives.

Others pushed back against price controls in any form, an idea that Trump himself railed against on the campaign trail. Cards aren’t the only area where he has now adopted the exact opposite line: Just last week, he proposed banning institutional investors like Blackstone Inc. from buying homes to rent, again in the name of affordability.

"History has shown that these [price] controls result in shortages, black markets, and suffering," said Nicholas Anthony of the libertarian Cato Institute. "In any event, consumers lose."

Affordability is an issue for many Americans. But in his desperate scramble to undo the damage of his tin-eared claims about the issue last year, Trump is looking in all the wrong places. He risks causing even more pain for the voters he promised to protect.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for The Wall Street Journal and the Financial Times.