Securitization of credit card debt and its determinants

Prior to the recent financial crisis, debt securitization was believed to reduce the cost of funding, improve credit risk management, and increase profitability.  Pavel and Phillis (1987) find that banks securitize debt because it provides an advantage for increasing profits.  Greenbaum and Thakor (1987) and Boot and Thakor (1993) suggest that the increase in revenue is due to asymmetric information.  Pais (2009) concludes that risky institutions with poor performance are more likely to securitize.

Since the financial crisis of 2008, a number of papers have examined the effects of the 2007-2009 recession on the volume of debt securitized and behind securitization.  Sarkisyan et al. (2009) create a fictional group of banks to illustrate what would happen if the banks had not securitized.  They compare this group to the banks that did securitize and find that banks that securitize tend to be more profitable, with higher credit risk exposure, and a higher cost of funding than non-securitized banks.  Hunter and Pennington-Cross (2009) examine securitized automobile loans and test whether there was an increase in automobile loans that were securitized before the recent financial and economic decline.  They find that as consumers’ financial conditions deteriorated, the portion of automobile loans that financial companies securitize increased.  They conclude that asymmetric information played a role in securitization in the automobile loan market before the recent financial crisis.

In this paper we examine the effect of macroeconomic and credit conditions on banks’ decision to securitized credit card debt.  In our model, we represent macroeconomic conditions in terms of the civilian unemployment rate, the inflation rate, and the growth of real GDP.  In order to capture the effect of credit conditions, we include in our model the net charge-off rate, the interest rate on commercial loans, the spread of credit card interest rates and the one-year Treasury bill rate, delinquency rate of credit cards issued by commercial banks, and a measure of risk in financial markets. 

We estimate our model using the multivariate GARCH-in-Mean specification and quarterly data covering the period from 1991 through 2010.  Our preliminary results indicate that during economic downturns, more credit card debt is securitized. Worsening credit conditions also lead to an increase in the proportion of credit card debt that is securitized by banks.  We find little support for the proposition that the impact of the determinants of debt securitization increased in the 2007-2010 period, and do not suggest that asymmetric information was used to securitize debt prior to the 2007-2009 recession.