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Credit Card Securitization and Regulatory Arbitrage

Credit Card Securitization and Regulatory Arbitrage 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Services Research Springer Journals

Credit Card Securitization and Regulatory Arbitrage

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References (8)

Publisher
Springer Journals
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Finance; Financial Services; Macroeconomics/Monetary Economics//Financial Economics
ISSN
0920-8550
eISSN
1573-0735
DOI
10.1023/B:FINA.0000029655.42748.d1
Publisher site
See Article on Publisher Site

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.

Journal

Journal of Financial Services ResearchSpringer Journals

Published: Sep 30, 2004

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