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Middle Class to Suffer Most From Bank Rules: Whitney

Tuesday, 5 Oct 2010 | 11:29 AM ET

As new regulations push banks toward safer investments and lending practices, the middle class will suffer the most, banking analyst Meredith Whitney told CNBC.

Cash and credit card
Cash and credit card

The 26 percent of mostly low-income Americans who don't have bank accounts—as well as the wealthy—are only marginally affected by tighter credit from more stringent banking regulations, Whitney said.

But those in the middle class who have relied on access to credit will suffer as banks that "can't price risk now" become increasingly afraid to make loans.

"We have to reckon with the fact that a very large portion of the US consumer base—which is really middle-class consumers—that were extended credit for the first time in huge swaths are being debanked from the system, so they're delevering," Whitney said, referring to the trend of consumers to save more while paying down debt.

"It's that middle group that is actually getting squeezed and pushed down in terms of demographics," she added. "That is going to put a lot of pressure on the US economy."

Rather than lending, banks in the new regulatory environment are focusing on trading for clients and with currencies, as well as asset management and advising, according to a report in Tuesday's Wall Street Journal.

That means less money to lend to consumers accustomed to having credit to pay for cars, improve their homes or go on vacation.

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"The real problem that exists is people just having credit ripped from their wallet. That's a social adjustment that we're going to have to deal with," said Whitney, head of the Meredith Whitney Advisory Group in New York. "If you had money and you don't have money anymore, that's a traumatic experience. If you had access to credit and you don't have anymore, that's a big adjustment and there'll be social consequences because of it."

Whitney is noted for calling the collapse of the financial system when the subprime mortgage market began imploding.

In her interview Wednesday, she called bank stocks uninteresting for now as the US economic recovery lags.

"The banks stocks are just boring at this point. They're not going to go up that much, they're not going to go down that much," she said. "If you've got a great international strategy, that's more exciting."

She did say that Visa and Mastercard offer opportunities in the financial sector as more and more banking operations become card-based transactions. Visa is off 24 percent while Mastercard is down 16 percent from their respective April 26 peaks, but Whitney said the credit card industry will regain strength.

"I like anything that embraces payments," she said. "That's just a freight train moving in the direction of 'let's have better ease of payments.'"

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