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US Regional Banks may gain from Basel II credit card treatment

WASHINGTON, December 20 – A small number of US regional banks may gain a cost advantage over their largest rivals in the credit card market as a result of the way the Basel II bank safety rules will be applied in the US.

Some of the big credit-card issuers may need to raise additional capital to meet an estimated increase in required minimum capital for credit cards under the risk-based Basel II, which in the US will apply only to the very largest of the nation’s banks from 2009.

However, overall the treatment of credit cards under the complex Basel II capital adequacy framework won’t have a substantial competitive effect on community banks and most regional banks, a US Federal Reserve study has concluded. Under US plans, thousands of community and regional banks won’t be adopting Basel II. Instead they will be subject to a more risk-sensitive version, dubbed Basel IA, of the current, and simpler, Basel I international capital rules that date from 1988.

Credit cards are not a major product line for community banks, which are locally-based banks with less than $1 billion in assets, or for the vast majority of regional banks, the report says. The study was undertaken in response to fears, particularly among community bankers, that the US adoption of Basel II would result in the estimated 20 or so large US banks that analysts expect to operate under Basel II enjoying lower capital requirements for various products, including credit cards.