December 18, 2008
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News: Industry Effects of Regulation.
Victory goes to the consumers today as the Fed finalizes approval of new credit card industry regulations designed to tame the "unfair and deceptive" practices that so many credit card holders have been complaining about. But the$970 billion credit card industry are countering that the regulators are going overboard with reforms that will lead to severe limits in the availability of credit to consumers. They contend that the restrictions will limit the various banks' ability to manage the risks they will face. This will serve to force institutions to withhold credit in the future. They will have to raise interest rates for everyone and eliminate such good perks as zero percent interest on purchases and balance transfers in order to protest themselves. This could result in curbing consumer liquidity even worse than it is now and reduce spending, thereby lengthening the economic recovery time. When cash flow gets cut off, they say, it will need to either replaced or substituted with some other means.
Replacing and compensating the means also applies to the credit card industry. They must use means' like adjusting lending interest or use other forms to keep themselves solvent. The deputy General Counsel of Bank of America (B of A), Gregory Baer, issued statements to the government recently commenting that, industry data indicates a very large drop in available credit lines would result. At a rate of 21%, the credit card market would lose about $931 billion worth of credit availability. Financial services law firm Morrison & Foerster, predicts industry loses in annual revenue for the credit card industry would be about $12 billion. J.P. Morgan Chase issued written comments, stating that such substantial losses to the industry could cause as much as a 12% increase in APR, reaching an average of about 16.58% for new accounts.
The message from the credit card industry to government is that each change needs to be carefully weighed against each consequence. Credit availability is on the line. As the president of the American Bankers Association, Ed Yingling, puts it: "They need to be concerned that on the one hand they're encouraging banks to lend more and on the other hand you have a series of policies that tell banks to lend less."