The Market Risk Premium for Unsecured Consumer Credit Risk
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.
Matthias Fleckenstein is with the University of Delaware. Francis A. Longstaff is with the UCLA Anderson School and the NBER. We are grateful for the comments and suggestions of Adair Morse, Annette Vissing-Jorgensen, and Antoinette Schoar. All errors are our responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.