This post was also published by In Debt and The Economic Populist.
Recently at the World Economic Forum in Davos, Switzerland, President Trump announced that he was asking Congress to cap interest for one year at 10 percent. “What ever happened to usury?” mused Trump to a room of bankers and CEOs.
Realizing that the usury rates banks thought they had defeated for good in the 1980s are at risk of coming back, bank lobbyists have been scrambling to defend their cash cow with any argument they can find. Industry released “new data” consisting of numbers that credit card bankers made up. This was not real data. It was an anonymous survey of (maybe just a few) bankers, asking them to guess the impact without reviewing any data to inform the guesses. Of course, these were not neutral experts making the guesses either.
But that didn’t stop bank CEOs from claiming that capping interest will force them to roll back lending. Jamie Dimon claimed a 10 percent cap would force banks to reduce lending by 80 percent. And PNC’s CEO recently said, admitting that he was “making up numbers here,” that a drop to a 10 percent rate would cause the industry to lose 4 percent a year.
So what does the real data say?
In September of last year, I released a paper that shows there is a substantial amount of profit and fat in the credit card business, so much so that banks can absorb a big cut to customers’ rates. (Don’t want to take my word for it? Former FDIC Chair Sheila Bair made the same point in The Financial Times over the weekend).
My analysis did a credit score tier-by-tier analysis of bank revenue, costs, and net returns and showed that a 10 percent cap on interest rates would save working families about $100 billion annually—an average savings of $899 per person each year. My analysis also found that this cap would NOT require much reduced lending to maintain profitability above the Federal Funds Rate (FFR), but would require banks to reduce advertising and rewards to customers with FICO scores under 760, and especially to those with scores under 700. Even the people who lose rewards would receive 3-4x more in interest savings from a cap, so financially they come out ahead. A 15 percent cap would save families $48 billion a year, and banks could absorb that reduction entirely in their profit margin without any other adjustments to rewards.
In other words, despite bank industry talking points claiming that a cap would render many consumers unprofitable, an interest cap wouldn’t necessarily do that. Underlying all of the banks’ analysis and pushback is a core false premise that they are charging the absolute minimum possible rates to everyone right now, such that any reduction in interest rate means they wouldn’t break even and would have to stop lending. If you believed them, you’d think your interest rate is exactly what it needs to be in order to lend to you based on your risk-level. By that assumption, even a 25 percent interest rate cap would cut off credit cards to everyone who currently has a 26 percent interest rate.
Regardless of whether you agree with a 10 percent interest rate cap, everyone should be able to see that this assumption is plainly false. Here are the actual economics of credit cards in the US (data is from accounts originated in 2015-2017, which were tracked through 2023):
Fig. 1: Market-wide Costs and Revenue
The net return on assets (ROA) is 6.24 percent, and that’s using only the interest revenue that exceeds the Federal Funds Rate, which is currently 3.64 percent. That is far in excess of what banks normally earn on everything else, which is 1.11 percent. I’m not recommending this, and this isn’t how it would work in the real world, but if we got rid of rewards and capped interest at zero, banks would make enough off interchange and fees to cover all borrower defaults and operating expenses, and still generate a return. That is how much margin and rewards spending is built into the credit card business right now.
And keep in mind that the 10 percent cap proposal is just for one year. A one-year 10 percent cap probably wouldn’t lead to a lot of business model adjustments—banks often give 0 percent promotional periods, and they would probably try to tread water for that year instead of closing accounts and losing long-term customers. For that year, my paper estimates that the ROA would drop to 2.15 percent below the FFR, all else equal. Banks have 6.76 percent in rewards cost and 0.95 percent in advertising that they could cut temporarily to ensure that they aren’t under the FFR for that year.
But if policymakers considered a permanent cap, as I noted above, banks would restructure their business models to ensure long-term profitability in each risk tier. A 10 percent cap would require banks to cut way back on ad spending, curtail rewards to anyone with FICO scores under 760 and eliminate rewards to anyone under 700 to maintain profitability. Even then, FICO scores under 600 would become unprofitable so you would see contraction of lending at that level. But the customers who lose rewards would gain more than 3-4 times that in interest savings, and that is assuming rewards have a one-to-one value for customers (which they don’t given rewards often go unredeemed). And only 12 percent of Americans have a FICO score below 600, and at these levels, credit cards are pretty rare. They are either secured cards or resemble predatory lending with default rates exceeding 10 percent. A reduction of rewards at mid-to-low risk tiers, and a shift of deep subprime customers to secured cards, in exchange for $100 billion in interest savings, is well within the bounds of a reasonable policy decision.
Last weekend, former Republican FDIC chair Sheila Bair proposed an alternative permanent solution of a cap of 10 percent above the FFR. A former senior manager in Capital One’s credit card division also endorsed that approach this week. That would be about 13.6 percent today. My report looked at that proposal and found that banks would be able to generate healthy returns with minimal changes, including to rewards. And it would save about $48 billion. But there is something else intuitive about that proposal—a margin of 10 percent above FFR was the historical norm, before the industry got greedy.
Fig. 2: Spread between FFR and credit cards since 1994
*Data from FRED and Bank Call Reports.
Looking at this chart, the story is quite clear. Going back to at least 1994, and probably earlier, the standard spread between FFR and credit card rates was 10 percent, give or take a couple hundred basis points. But when the Fed lowered rates after the financial crisis, banks chose not to drop the rates on their credit cards. When the Fed started increasing the rates in the late 2010s, banks did make corresponding increases. Then the Fed dropped rates to zero again during COVID. The banks once again chose not to lower rates on their credit cards. Again, once inflation kicked in and the Fed increased rates, banks did increase their rates. We are now in the middle of the Fed lowering rates again, and again, there are no signs of banks planning to lower credit card rates. In fact, the rates banks have been charging on credit cards in the last few years are 5 percent higher than at any other time going back at least 30 years.
Do you see the pattern? It’s a one-way ratchet! Banks increase their card rates with Fed increases, but don’t decrease rates with Fed decreases. Since 2008, the Fed has dropped rates three times (including the current decreases) and raised rates twice. Credit card rates increased during those Fed increases, and stayed flat during periods when Fed rates went down. After two cranks of the ratchet, the average spread above FFR went from the historical 10 percent to now 17 percent. If banks were currently charging the prior norm of 10 percent more than FFR, right now average credit card rates would be 13-14 percent. But they are 21 percent.
I think if you were able to look under the hood of the “data” that bank lobbyists are relying on in their public talking points, you’d see two basic presumptions: (1) the current ROAs were reached through some rational operation of the market, and therefore cannot be lower, and (2) banks can’t reduce rewards.
But the truth is, banks have been generating excess returns for years. It wasn’t that long ago that banks would have been thriving off charging 13-14 percent interest rates in today’s rate environment. Due to their market power and the low salience of rates to customers, banks have been able to take advantage of periods of Fed rate increases to increase the spread on their credit card rates. And bank executives have been using the proceeds to spend an astronomical amount on stock buybacks. Over the last 10 years, just the largest four banks (JPMC, Citi, BofA, and Wells Fargo) spent $500 billion on stock buybacks, and more on higher-than-average dividends. In 2025, banks once again led the stock market in buybacks. As a result, bank stocks have been going up steadily. For example, Jamie Dimon made $770 million in 2025, not due to his salary, but due to JPMC’s stock price. Capital One CEO Richard Fairbank brought home more than $300 million.
We do not need to set public policy to preserve 6.24 percent returns, 12-figure stock buybacks, and $770 million compensation packages for bank bosses like Jamie Dimon and Richard Fairbank.
As for rewards, if a permanent cap reduced the returns on a FICO tier below what the bank needs to lend, the bank would reduce cash-back rewards or airline miles to that FICO tier instead of closing the accounts in that tier because banks would rather make some money off those customers than none. And that would be okay. On net, people would save money. Banks would reduce rewards by as much as they have to to maintain profitability. In theory, they could decrease rewards even more, or increase annual fees, if they wanted to preserve higher-than-normal returns. But then again, rewards and annual fees are what credit card banks actually compete with. Banks would need to balance their profit margins against the effect that reducing rewards or raising fees would have on competitiveness and customer volume. That is what a healthy, competitive market looks like, rather than a one-way ratchet of rate increases.
