In this paper, we develop and test a model of implicit recourse in asset-backed securitizations. Fraud losses on securitized assets are generally incurred by the bank and do not affect the performance of securitization trusts, while credit losses do affect the trust’s performance and are potentially borne by the owner of the securitized assets. Thus, the classification of losses as either fraud or credit losses provides a potential avenue of implicit recourse to manipulate the performance of securitization trusts. Using annual data from 2001 to 2006, we find that the performance of the credit card securitization portfolio is negatively related to fraud losses reported by the bank. We examine these results in light of the proposed Basel II capital rules and argue that a bank’s incentive to provide implicit recourse will increase under the anticipated regime

This paper provides a theoretical analysis of the benefits for an insurance company to develop its own network of service providers when insurance fraud is characterized by collusion between policyholders and providers. In a static framework without collusion, exclusive affiliation of providers allows insurance companies to recover some market power and to lessen competition on the insurance market. This entails a decrease in the insured’s welfare. However, exclusive affiliation of providers may entail a positive effect on customers’ surplus when insurers and providers are engaged in a repeated relationship. In particular, while insurers must cooperate to retaliate against a fraudulent provider under non-exclusive affiliation, no cooperation is needed under exclusive affiliation. In that case, an insurer is indeed able to reduce the profit of a malevolent provider by moving to collusion-proof contracts when collusion is detected, and this threat may act as a deterrent for fraudulent activities. This possibility may supplement an inefficient judicial system: it is thus a second-best optimal anti-fraud policy