Trump's interest rate cap policy is "in doubt"! Wall Street warns that it may trigger credit tightening and economic ripple effects.

Wall Street analysts pointed out on Monday that the policy of setting a cap on credit card interest rates at 10% by US President Donald Trump may not only have a significant impact on the banking industry, but its effects may also extend to consumer-related industries such as aviation, retail, and may even force consumers to turn to other lending channels with much higher fees than credit cards, such as new banks, payday loans, and other high-cost financing tools, leading to a chain reaction in the market ecology. At the same time, issuing banks may take multiple strategies to offset the pressure brought by the interest rate cap, including raising card fees, cutting consumer rewards, reducing operating expenses, tightening credit limits, especially if the policy becomes permanent, these measures will become more significant. However, the implementation of this cap remains a huge question mark, as previous attempts have all ended in failure. Analyst Jeffrey Adler of Morgan Stanley pointed out in a report to clients that since the Supreme Court rejected the setting of credit card interest rate caps by individual states in 1978, there have been multiple attempts at the federal level to legislate caps. Analysts John Pancari and Glen Schorr of Evercore ISI wrote in a report, "For issuing institutions, the overall impact on revenue will be significantly negative before any countermeasures are taken; however, implementing such caps may be challenging and has failed in the past." Over the weekend, the Bank Policy Research Institute, the Bank of America Corp Association, the Consumer Bankers Association, the Financial Services Forum, and the Independent Community Bankers Association issued a joint statement stating that the executive order will reduce credit supply and force consumers to turn to less regulated and more costly options. KBW analyst Sanjay Sakhrani stated in a report, "We believe the probability is low, but given the government's stated intent, we will continue to monitor. We doubt that regulatory agencies have the authority to set any fee caps, action must be taken by Congress." Currently, Trump is calling for a one-year cap on credit card interest rates at 10%, and stock analysts generally believe that for most issuing banks, this short-term policy is still manageable. However, if the cap becomes permanent, Morgan Stanley analyst Adler points out that there will be multiple chain reactions - not only will it significantly impact the earnings per share of most credit card companies, but it may also lead to tightening credit strategies (such as reducing credit to non-preferred consumers), lowering consumer reward programs, raising various card fee standards, and cutting operating costs. KBW analyst Sakhrani wrote, "In an economy driven by consumer spending, with credit card spending accounting for slightly over 20%, any move by issuing institutions to tighten credit could potentially have systemic repercussions on the economy." He pointed out that the aviation and retail industries rely on income related to credit cards; additionally, as credit tightens, consumers will have to turn to other lenders such as emerging banks, payday loan institutions, and others. JPMorgan analyst Vivek Juneja wrote, "The real issue is that the pandemic has brought about high inflation and increased concentration, strengthening pricing power, and the significant differentiation in income/wealth between high and low-income consumers is marginalizing the middle-income group and increasing pressure." As the Fed raises interest rates to curb inflation, credit card rates have increased significantly, but Juneja believes that this is not the main cause of the affordability crisis. "In our view, a one-year temporary cap will not only fail to solve the problem, but may exacerbate it in the long run." Among large banking institutions, Citigroup (C.US) has the highest proportion of credit card loans, accounting for 23% of total loans, followed by JPMorgan (JPM.US), Bank of America Corp (BAC.US), US Bancorp (USB.US), and Wells Fargo & Company (WFC.US). KBW estimates that Citigroup's earnings per share will decrease by about 10% in 2026, with smaller impacts on JPMorgan, Bank of America Corp, Wells Fargo, and US Bancorp, ranging from -1% to -4%. Morgan Stanley believes that the book value of credit card companies will be severely impacted: under a temporary cap, the book value of Bread Financial (BFH.US), Synchrony Financial (SYF.US), First Capital Inc. Credit (COF.US), and American Express Company (AXP.US) could decrease by 20% - 40%. Morgan Stanley's Adler said, "Under simplified assumptions and without any countermeasures, the decline in credit card revenue will completely wipe out profits for Bread Financial, First Capital, Inc. Credit, and Synchrony Financial, and reduce profits for American Express Company by 80% and Citigroup by 60%. However, we expect the industry to make significant strategic adjustments, including reducing credit to low FICO score consumers (favorable provisioning/net write-offs), increasing fees, reducing rewards, and cutting other expenses." Evercore ISI reached a similar conclusion, stating, "Our income sensitivity analysis shows that issuing institutions with the highest reliance on net interest income will face negative impacts of 6070%, while institutions with more diversified businesses will range from 1030%; universal banks and regional banks will be in the low to mid-single digits, relatively controllable range." The above evaluation also does not take into account the countermeasures that lending institutions may take. On Monday, the stock market fully reflected the level of risk: lending institutions with more borrowers with low credit scores experienced the biggest declines. Bread Financial fell by over 10% on Monday, Synchrony Financial by 8.36%, and First Capital, Inc. Credit by 6.42%. As for the large banks, Citigroup fell by 2.98% on Monday, JPMorgan by 1.43%, Bank of America Corp by 1.18%, Wells Fargo by 1.03%, and US Bancorp by 1.49%. Richard Shane, a consumer finance analyst at JPMorgan, summarized, "Currently, we believe that while the impact of this event is broad and the probability of occurrence is low, there may still be significant legal challenges. Therefore, we have not adjusted our fundamental expectations, but we must emphasize that industry uncertainty has significantly increased, which may have a suppressive effect on valuation multiples." The institution's benchmark scenario predicts that the return on consumer finance business in 2026 will be in the low single-digits range, with "downside risks slightly higher than normal levels".