Impact of FAS 166/167 on Credit Card Securitization

Abstract

We examine the impact of FAS 166/177 on the quantity and quality of credit card loans of the affected securitization banks. We focus on credit card securitization because its nature makes it most likely to be consolidated back onto the balance sheet after FAS 166/167. Using credit card loans of non-securitization banks as controls, we document the following findings. First, the balance of total managed credit card loans for securitization banks decreases significantly from pre to post-FAS 166/167 period. Second, we find significant lower asset quality for non-securitized credit card loans relative to securitized loans of the same securitization bank prior to the adoption of FAS 166/167. Furthermore, we find significant improvement of the asset quality for credit card loans of the securitization banks after the adoption of FAS 166/167, especially for banks whose regulatory capital ratios are closer to the legal minimum after the adoption of the accounting rules. Overall, our findings suggest that banks have less opportunity to engage in regulatory capital arbitrage after the adoption of FAS 166/167 and adjust their risk taking behavior accordingly.