Credit Card Securitization and Regulatory Arbitrage

FRB of Philadelphia Working Paper No. 03-7

36 Pages Posted: 29 Jul 2004

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Multiple version iconThere are 2 versions of this paper

Date Written: April 2003

Abstract

This paper explores the motivations and desirability of off-balance-sheet financing of credit card receivables by banks. The authors explore three related issues: the degree to which securitizations result in the transfer of risk out of the originating bank, the extent to which securitization permits banks to economize on capital by avoiding regulatory minimum capital requirements, and whether banks' avoidance of minimum capital regulation through securitization with implicit recourse has been undesirable from a regulatory standpoint. The authors show that this intermediation structure could be motivated either by desirable efficient contracting in the presence of asymmetric information or by undesirable safety net abuse. They find that securitization results in some transfer of risk out of the originating bank but that risk remains in the securitizing bank as a result of implicit recourse. Clearly, then, securitization with implicit recourse provides an important means of avoiding minimum capital requirements. The authors also find, however, that securitizing banks set their capital relative to managed assets according to market perceptions of their risk and seem not to be motivated by maximizing implicit subsidies relating to the government safety net when managing their risk. Thus, the evidence is more consistent with the efficient contracting view of securitization with implicit recourse than with the safety net abuse view. Concerns expressed by policymakers about this form of capital requirement avoidance appear to be overstated.

Keywords: Credit Card Securitization

JEL Classification: G21, G11, G28

Suggested Citation

Calomiris, Charles W. and Mason, Joseph R., Credit Card Securitization and Regulatory Arbitrage (April 2003). FRB of Philadelphia Working Paper No. 03-7. Available at SSRN: https://ssrn.com/abstract=569862 or http://dx.doi.org/10.2139/ssrn.569862

Charles W. Calomiris (Contact Author)

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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Joseph R. Mason

Louisiana State University - Ourso School of Business

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University of Pennsylvania - Wharton Financial Institutions Center ( email )

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United States

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