ho says credit cards are a stagnating business? Not the Federal Reserve Board. In fact, a new report from the Fed suggests net before-tax earnings as a percentage of outstanding balances amounted to 3.66% at large credit card banks last year. This represents an increase of 38 basis points, or 11.6%, over 2002, the Fed said.

The Fed defines a "large" credit card bank as a federally insured financial institution with assets in excess of $200 million, and the bulk of those assets in consumer lending with at least 90% of loans originated using credit cards or related products. In banking parlance, these institutions are known as "monolines."

Monolines first came into play in the early 1980s, when a few smart lawyers discovered a gaping loophole in banking laws that made the trend possible; most have been in operation for about 20 years now.

At the end of 2003, there were 21 of these financial institutions which, combined, accounted for 67.5% of outstanding credit card balances on the banks' books or in pools of securities, according to the Fed's data.

Concerns about consumer credit quality, brought on by economic uncertainties have led some experts to speculate that the bubble of credit card profitability may be vulnerable. But the Fed, in a June report to Congress, dispels those concerns, suggesting that credit card issuance remains a prime source of earnings for banks.

"Returns on credit card operations have been increasing over the past four years and compare favorably with returns experienced in the mid-1990s," the Fed wrote in its annual report to Congress on credit card profitability.

"Although profitability for large credit card banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities."

For example, the Fed noted, the average return on assets (before taxes) for all commercial banks was 2.05% in 2003, well below average returns on credit activities.

Banks are competing aggressively for credit card customers, the Fed said; among the largest issuers, competition has focused keenly on pricing. Most of the largest issuers, the Fed noted, have lowered rates on many accounts below the 18 - 19% levels commonly maintained through the 1980s and 1990s.

Credit card rates averaged 12.92% in 2003, according to the Fed's data, marking the fifth consecutive year that rates have averaged less than 15%. During 2000, rates averaged 14.91%, and in 2002 they averaged 13.09%. The Fed points to numerous factors for this general decline in credit card rates, including stiff competition and a "sharp" decline in issuers' costs of funds

"Aggressive competition for new customers during 2003 was at least partly the cause of a 6% increase from 2002 in the number of Visa and MasterCards in circulation, to a total of 556.3 million," the Fed said. Cards per customer also increased by about 2%, rising to an estimated 4.8 cards per person, according to the Fed's report.

Separately, in a report released in early July 2004, the Fed reported that outstanding consumer credit continues to increase. Consumer credit rose 5% in May, the Fed reported. Revolving credit (mostly credit card outstandings) posted a 2.5% gain during that period. Revolving consumer credit outstanding totaled $2.0312 trillion in May 2004, the Fed said.