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Implicit recourse and credit card securitizations: What do fraud losses reveal?

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  • Vermilyea, Todd A.
  • Webb, Elizabeth R.
  • Kish, Andrew A.
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    Abstract

    In this paper, we develop and test a model of implicit recourse in asset-backed securitizations. Fraud losses on securitized assets are generally incurred by the bank and do not affect the performance of securitization trusts, while credit losses do affect the trust's performance and are potentially borne by the owner of the securitized assets. Thus, the classification of losses as either fraud or credit losses provides a potential avenue of implicit recourse to manipulate the performance of securitization trusts. Using annual data from 2001 to 2006, we find that the performance of the credit card securitization portfolio is negatively related to fraud losses reported by the bank. We examine these results in light of the proposed Basel II capital rules and argue that a bank's incentive to provide implicit recourse will increase under the anticipated regime.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-4R29614-3/1/88f0504acf8449a0842b6d6c72922947
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 7 (July)
    Pages: 1198-1208

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:7:p:1198-1208

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    Web page: http://www.elsevier.com/locate/jbf

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    References

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    1. Lang, William W. & Mester, Loretta J. & Vermilyea, Todd A., 2008. "Competitive effects of Basel II on US bank credit card lending," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 478-508, October.
    2. Charles Calomiris & Joseph Mason, 2004. "Credit Card Securitization and Regulatory Arbitrage," Journal of Financial Services Research, Springer, vol. 26(1), pages 5-27, August.
    3. Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer, vol. 28(1), pages 113-133, October.
    4. Higgins, Eric J. & Mason, Joseph R., 2004. "What is the value of recourse to asset-backed securities? A clinical study of credit card banks," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 875-899, April.
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    Cited by:
    1. Hartmann-Wendels, Thomas & Mählmann, Thomas & Versen, Tobias, 2009. "Determinants of banks' risk exposure to new account fraud - Evidence from Germany," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 347-357, February.
    2. Sarkisyan, Anna & Casu, Barbara, 2013. "Retained interests in securitisations and implications for bank solvency," Working Paper Series 1538, European Central Bank.
    3. Riachi, Ilham & Schwienbacher, Armin, 2013. "Securitization of corporate assets and executive compensation," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 235-251.
    4. Cardone-Riportella, Clara & Samaniego-Medina, Reyes & Trujillo-Ponce, Antonio, 2010. "What drives bank securitisation? The Spanish experience," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2639-2651, November.

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