Credit Card Structures: Surviving the “Worst Case” Scenario

Abstract

In this update to “Credit Card Structures and Their Ability to Weather Hard Times” published in the Spring 2008 issue of The Journal of Structured Finance, the author notes that the “hard times” referred to in the Spring 2008 article have tested credit card structures much more severely than most observers then anticipated, mimicking in some cases the “worst case” scenario that rating agencies and investors have used to model the creditworthiness of asset-backed securities. Nonetheless, most credit card securitization programs have survived with the AAA ratings of their most senior securities intact, allowing these securities to qualify as eligible collateral for borrowings from the New York Federal Reserve Bank under the Term Asset-Backed Securities Facility (TALF). In some cases, banks have added additional support to their structures in order to avoid ratings downgrades, and this support may have regulatory capital implications. Also, new financial stress is resulting from the new laws and regulations restricting credit card lending, which are likely to impair but not eliminate profitability. Revisions to FASB Statements 166 and 167 threaten to decrease the attractiveness of securitization for credit card banks by putting the securitized assets back onto those banks’ balance sheets. On the whole, however, credit card structures continue to be resilient and credit card finance is likely to continue as an important source of funding for credit card lenders.