Credit Card Securitization and Regulatory Arbitrage

Posted: 5 Aug 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

Abstract

This paper explores the motivations and desirability of off-balance sheet financing of credit card receivables by banks. We 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. We show that regulatory capital arbitrage is an important consequence of securitization. The avoidance of capital requirements could be motivated either by efficient contracting or by safety net abuse. We find 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. This evidence is more consistent with the efficient contracting view of securitization with implicit recourse than with the safety net abuse view.

Keywords: Bank capital regulation, credit card banks, securitization

Suggested Citation

Calomiris, Charles W. and Mason, Joseph R., Credit Card Securitization and Regulatory Arbitrage. Journal of Financial Services Research, Vol. 26, No. 1, August 2004. Available at SSRN: https://ssrn.com/abstract=572566

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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United States
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University of Pennsylvania - Wharton Financial Institutions Center ( email )

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United States

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