Special Purpose Vehicles and Securitization

Abstract

Abstract This chapter provides evidence that credit card securitizations do not transfer as much risk as a literal interpretation of such structures might imply. It is argued that the existence of special purpose vehicles (SPVs) depends on implicit contractual arrangements that avoid accounting and regulatory impediments to reducing bankruptcy costs. It outlines the significant features of securitization SPVs. Securitization is a significant and growing phenomenon. The simple model of off-balance sheet financing has the unique ability to find high-quality projects for the bank by making an effort. It is suggested that the risk of a sponsoring firm should impact the risk of the asset-backed securities that are issued by its SPVs. Riskier firms are more likely to securitize though the effect is not always monotonic, depending on the specification. The efficient use of off-balance sheet financing is facilitated by an implicit arrangement, or contractual relations, between sponsoring firms and investors.