By Saeed Azhar, Tatiana Bautzer and Manya Saini
NEW YORK, Jan 16 (Reuters) - U.S. banks on Tuesday face a tricky political test in how to address a call from President Donald Trump to cap credit card interest rates - leaving the finance industry scrambling on how to proceed, according to several industry sources.
Trump said on January 10 he was calling for a one-year cap on credit card interest rates at 10% starting on January 20, a move that hit share prices and prompted banks to warn it would hurt
consumers' access to credit. However, the White House has not provided details on how the plan will come to fruition on that day or how it would be enforced.
Such a dramatic move could likely not be enforced through executive powers or financial regulators and would require legislation in Congress, where such efforts have failed in the past, according to regulatory experts and analysts.
White House economic adviser Kevin Hassett earlier floated floated the idea of “Trump cards” that banks would voluntarily offer instead of being forced by a new law, speaking on Friday to Fox Business Network's "Mornings with Maria" program.
Bloomberg on Friday reported that the White House was weighing using an executive action, citing sources.
The lack of firm guidance leaves banks with a dilemma ahead of Tuesday. Some analysts say the industry may push for a compromise in which lenders launch new products with lower rates and fewer benefits.
NO REQUIREMENT TO COMPLY
Banks have been scratching their heads about what may happen that day, given as of Friday, there was no legal or regulatory requirement to comply, said a source at a major bank who declined to be identified speaking about sensitive policy issues.
That person and a credit card industry insider said the industry had been in discussions with the administration to gain clarity. Despite the confusion over how the administration might implement the cap, lenders were taking Trump's directive seriously, said a third industry source.
Indeed, the finance industry was caught off guard by the announcement last week. In the wake of it, one bank prepared its CEO in case of a call from an administration official, the banking source said.
"I think there will be an ongoing conversation between the industry and the administration," said Stephen Biggar, a banking analyst at Argus Research, although he was uncertain what might happen on Tuesday.
The industry has for years fought bills in Congress that would cap credit card rates, and its position had not changed, said a fourth source at a trade group who added that banks expected to ramp up their advocacy efforts to fight the proposal in the coming weeks.
Trump's announcement is seen as an attempt to address voter concerns over the cost of living ahead of congressional elections this year, in a revival of his presidential campaign pledge.
"The president certainly has an expectation ... that the credit card companies will do this," White House spokeswoman Karoline Leavitt told reporters on Thursday. "I don't have a specific consequence to outline for you, but certainly this is an expectation, and frankly, a demand that the president has made."
Hassett said on Friday that the administration was discussing with big bank CEOs how to extend credit to borrowers who lack it but could otherwise qualify.
A White House official said the Trump administration was exploring every tool possible to address an affordability crisis that it blames on the Biden administration.
POSSIBLE SOLUTIONS
Credit cards are extremely profitable, and a cap could affect future earnings expectations of larger banks and card companies, said David Krakauer, vice president of portfolio management for Mercer Advisors.
Card providers could instead make conciliatory gestures with innovative offerings, such as lower rates for certain customers or no-frills cards that could charge 10% but have no rewards, or lower credit limits, analysts said. Some banks, like Bank of America, already offer similar cards.
"Banks could offer either a new card or a line to a customer at a rate that was probably in the 10% area, but keeping in mind that the likely features of that card would be less robust," said Moshe Orenbuch, managing director at TD Cowen.
While banks can push back, there's a limit to how far, said Brian Mulberry, senior client portfolio manager at Zacks Investment Management, which owns several large-cap bank stocks.
"Policy volatility is likely to create market volatility until there is a clear path forward for banks and regulators."
(Additional reporting by Michelle Price, Pete Schroeder, Laura Matthews, Nandita Bose, Susan Heavey in Washington; Writing by Megan Davies; Editing by Rod Nickel)
