At the time of the sale, a bank is able to recognize its right to future excess cash flows generated by the sold receivables. Poorly performing receivables may hinder the bank's access to the securitization market, require higher credit enhancements to achieve investment grade ratings, and significantly increase the cost of this funding source.Īs a result of securitizing its credit card receivables, a bank creates an accelerated or "paper" earnings and capital under current accounting rules. The key to a bank's success with using securitizations lies in the quality of the underlying receivables, which is directly related to the underwriting and credit risk management techniques employed. Realization of the benefits of credit card securitizations, however, requires appropriate risk management processes. This increased marketability of the subordinated bonds, particularly during lower interest rate environments and narrower spreads, has resulted in the credit card ABS market being a primary funding tool even more attractive to credit card issuers. Investors are also more attracted to the more subordinated certificates, particularly the triple-B rated issues, often referred to as the Class C market. While there are several reasons for increased investor confidence, the use of more sophisticated monitoring and effective credit risk management techniques have and continue to enhanced investors' comfort with these products. Investor acceptance of the credit card ABS has grown considerably as the market has matured. In contrast, the unsecured corporate bond market is typically a less attractive and less cost-effective funding source as the ratings on the bonds reflect the strength of the institution, which is typically lower, therefore, requiring higher spreads. Even un-rated or low-rated institutions can obtain investment grade ratings on their asset-backed securities (ABS) since investors look to the securitization structure of underlying assets and credit enhancements rather than the institution for repayment. Securitizations are the largest funding source for credit cards, representing over 50 percent of the industry's funding. In addition, servicing is often retained by the originator which minimizes customer disruption and enhances fee income. In addition, securitizations may allow banks to reduce asset-class concentrations in the overall portfolio, create underwriting and pricing discipline (provides market feedback regarding asset value), and leverage origination skills and systems capacity by increasing the volume of transactions that pass through the bank. By using securitizations, a credit card issuer may be able to obtain lower cost funding, diversify its funding sources, improve financial indices, potentially lower regulatory costs, and increase its ability to manage interest rate risk. Securitizations, when used properly, provide financial institutions with a useful funding, capital, and risk management tool. The discussions contained in this manual focus on a bank's role as the loan originator and servicer, rather than as an investor, in credit card receivable-backed securities. This manual is intended to assist examiners in understanding and evaluating the credit card securitization process. Weak underwriting standards, poor servicing, or inadequate liquidity planning are examples of risks, which, if poorly managed can damage a credit card issuer's reputation and cause serious financial problems. The benefits of securitizing credit card receivables can be substantial however, securitization activities are susceptible to economic influences and present other risks that need to be managed and controlled. Thus, a credit card issuer may be able to sell securities with lower coupon rates, and thereby, reducing its funding costs. Because investors look to the securitization structure of underlying assets and credit enhancements rather than to the credit card issuer (selling bank) as a source of repayment, unrated or low-rated credit card issuers may be able to obtain triple-A ratings on the securitized credit card receivables. Credit card issuers rely on this type of funding to manage liquidity and capital, to reduce exposure to interest rate risk, and to generate fee income. Generally defined, the securitization of credit card receivables is the process by which these financial assets are transformed into securities. including office furniture, fixtures, and equipment. Portion (if any) exceeds coverage limits at that bank.Īre My Deposit Accounts Insured by the FDIC?įDIC-insured institutions to conduct business and exchange Specific group of deposit accounts — what's insured and what Determine how the insurance rules and limits apply to a
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