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What is the value of recourse to asset backed securities? A clinical study of credit card banks

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Eric J. Higgins
Joseph R. Mason
Abstract

The present paper uses data from revolving credit card securitizations to show that, conditional on being in a position where implicit recourse has become necessary and actually providing that recourse, recourse to securitized debt may benefit short- and long-term stock returns, and long-term operating performance of sponsors. The paper suggests that this result may come about because those sponsors providing the recourse do not seem to be extreme default or insolvency risks. However, sponsors providing recourse do experience an abnormal delay in their normal issuance cycle around the event. Hence, it appears that the asset-backed securities market is like the commercial paper market, where a firm's ability to issue is directly correlated with credit quality. Therefore, although in violation of regulatory guidelines and FASB140, recourse may have beneficial effects for sponsors by revealing that the shocks that made recourse necessary are transitory. ; Also issued as Payment Cards Center Discussion Paper No. 03-04

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-6.

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Date of creation: 2003
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Handle: RePEc:fip:fedpwp:03-6

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Keywords: Asset-backed financing ; Credit cards;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Altman, Edward I. & Haldeman, Robert G. & Narayanan, P., 1977. "ZETATM analysis A new model to identify bankruptcy risk of corporations," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 29-54, June. [Downloadable!] (restricted)
  2. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December. [Downloadable!] (restricted)
  3. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March. [Downloadable!] (restricted)
  4. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January. [Downloadable!] (restricted)
  5. Loughran, Tim & Ritter, Jay R, 1997. " The Operating Performance of Firms Conducting Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 52(5), pages 1823-50, December. [Downloadable!] (restricted)
  6. Charles W. Calomiris & Joseph R. Mason, 2003. "Credit card securitization and regulatory arbitrage," Working Papers 03-7, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  7. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March. [Downloadable!] (restricted)
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  1. Charles W. Calomiris & Joseph R. Mason, 2003. "Credit card securitization and regulatory arbitrage," Working Papers 03-7, Federal Reserve Bank of Philadelphia. [Downloadable!]
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