Working Paper: NBER ID: w28029
Authors: Matthias Fleckenstein; Francis A. Longstaff
Abstract: We use the prices of credit card asset-backed securities to study the market risk premium associated with unsecured consumer credit risk. The consumer credit risk premium has historically been comparable to high yield corporate bond spreads, but has increased dramatically since the financial crisis. We find evidence that this increase is primarily due to balance-sheet costs imposed by recent changes in regulatory capital requirements which have effectively placed credit card securitizations back onto issuer balance sheets. These changes in capital regulation may have added hundreds of basis points to the cost of unsecured household credit.
Keywords: consumer credit; risk premium; credit card; asset-backed securities; regulatory capital
JEL Codes: G12; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory changes (G18) | consumer credit risk premium (G21) |
| reconsolidation of credit card securitizations onto issuer balance sheets (G32) | tighter capital constraints (F65) |
| tighter capital constraints (F65) | higher costs for meeting regulatory requirements (K23) |
| higher costs for meeting regulatory requirements (K23) | consumer credit risk premium (G21) |
| balance-sheet costs (G32) | consumer credit risk premium (G21) |
| quarter-end reporting pressures (C22) | consumer credit risk premium (G21) |
| required risk-retention ratios for credit card receivables (G32) | consumer credit risk premium (G21) |
| intermediary leverage (G32) | consumer credit risk premium (G21) |
| capital ratios (G32) | consumer credit risk premium (G21) |