Print

ECONOMISTS: NEW CREDIT CARD REGULATIONS WOULD HURT CONSUMERS, ECONOMY
American Bankers Association Releases Credit Card Regulation Analysis

 WASHINGTON, Oct. 1 – A new study released today by noted economists Jonathan Orszag and Susan Manning concludes that placing further legislative restrictions on credit card interest rates and fees is likely to harm the vast majority of consumers, most of whom manage credit cards successfully. The study, sponsored by the American Bankers Association, reaches three primary conclusions:

1.       Proposals for price controls on credit cards may help a small minority of borrowers, but only at the cost of harming the vast majority of borrowers;

2.       Innovation and deregulation have allowed credit card prices to reflect borrower risk more precisely, which has benefited the vast majority of borrowers; and

3.       Effective alternatives exist to protect consumers from unfair or deceptive credit card practices without raising costs or limiting credit access for other borrowers.

Orszag, senior managing director of economic consulting firm Competition Policy Associates, Inc. (COMPASS), and Manning, a managing director of COMPASS, point out that during the past 25 years credit cards have evolved from a limited-use product primarily for high-income individuals to a financial tool widely relied upon daily by the majority of American families.

The study provides evidence that innovations in the credit card industry have benefited cardholders by making credit available to many more Americans at much lower prices than a generation ago.  It also demonstrates that credit card interest rates and penalty fees reflect the risk of a borrower’s failure to pay.

Orszag and Manning argue that recent proposals to regulate the credit card industry by imposing caps or other constraints on fees and interest rates would yield far more harm than benefits – a concern borne out by historical and international experience. 

“Imposing rate or fee regulations is the functional equivalent of squeezing a balloon,” explained Orszag.  “The air—that is, interest rates and fees—is just shifted from one side of the balloon to the other—that is, from higher risk card holders to lower risk ones.”  In addition, Orszag explained, “Legislative restrictions on the interest rates and fees that bank issuers can charge would reduce the availability of credit for many higher-risk and lower-income borrowers. Those borrowers with reduced access to credit would find it harder to deal with emergencies and might have to resort to higher-cost forms of borrowing, such as payday lending.”

The study argues that such restrictions also would harm the economy more broadly as a result of consumers’ reduced ability to maintain consumption through periods of income disruptions or borrow against future earnings.

“A better approach would be to help the minority without harming the majority through improved disclosure, increased consumer financial literacy, and consolidated regulatory oversight for unfair or deceptive practices,” explained Orszag.  “Any additional regulatory intervention is particularly unwarranted before the effects are known of the Federal Reserve Board’s recent proposal to improve the effectiveness of credit card disclosures.  The proposed changes are the result of exhaustive and comprehensive analysis and, more importantly, consumer testing to determine readability and clarity of disclosures.”

In addition to his position at COMPASS, Orszag is a Fellow at the University of Southern California’s Center for Communication Law & Policy.  Previously, Orszag served on President Clinton’s National Economic Council and as the Assistant to the Secretary of Commerce and Director of the Office of Policy and Strategic Planning.  Manning has more than 20 years of economic consulting experience, including extensive expertise in competition and regulatory policy analyses.

A copy of the full report, An Economic Assessment of Regulating Credit Card Fees and Interest Rates, is available on the ABA's Web site at: /aba/documents/press/regulating_creditcard_fees_interest_rates92507.pdf

The American Bankers Association, on behalf of the more than two million men and women who work in the nation's banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry.  Its membership-which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks-makes ABA the largest banking trade association in the country.   

###