The market for securities backed by credit and receivables may have been permanently altered by the flap over interest rates.

Even if Congress doesn't cap the credit card rates anytime soon, investors now know that it could happen.

The result: The value of credit card securities on the open market will probably remain depressed. That could go double for bank stocks, especially those institutions that are highly dependent on credit card profits.

Spreads Widen

Before the current furor, two-year securities backed by credit cards were trading about 62 basis points higher than comparable Treasuries. Since last week, that spread has widened to nearly 100 basis points, according to Kenneth Bock, a vice president at Morgan Stanley & Co.

"I don't think there's any way spreads will get back to where they were before," said one trader, echoing a widely felt sentiment that investor concern will linger long after the current credit card debate dies down in Congress.

In another clear reaction to the credit card flap, Citicorp on Friday afternoon raised the yield on a $1.7 billion package of securities backed by credit card receivables it sold last week. The yields on all four parts of the package were increased by 5 basis points.

Congress, by its discussion of the credit card market, has added somethign called "event risk" to investors' calculations. The potential "event," of course, is some act of Congress that would cap interest rates on credit cards.

Risks Had Been More Limited

Previously, investors in this arena worried mainly about interest rate risk, the possibility that interest rates would rise and leave them with less valuable securities. To a lesser degree they had to worry about default risk, the possibility that a larger than expected number of cardholders would default on their payments. This, of course, could cut into investors' returns.

If Congress ever did pass a cap, it would push down yields on the credit card accounts that back securities now in the market.

Banks would likely respond by prepaying most of the outstanding securities, a tactic that is allowed under legal clauses in the deals.

Prepayments would be bad news for investors, because with interest rates so low, they would have a hard time finding alternative investments that pay as well.

Already, some banks are probably altering their plans for securitizing credit card receivables. In past years, banks that were eager to boost their capital ratios in time for yearend financial reports often rushed into the market in October and November. But this year promises to be different.

A number of banks came to market in the third quarter of 1991, hoping to sell securities before lots of other companies got the same idea.

As a result, most asset-backed securities specialists were already expecting activity to be light in the fourth quarter. But now, with the new uncertainty in the market, activity will probably be even lighter than most people think.

'Monkey Wrench' in the Works

"If I were an issuer, I sure wouldn't be coming to market right now," said Thomas Hourican, a senior vice president at Standard & Poor's Corp. "This is a real monkey wrench in everything."

Security Pacific Corp. is said to be prepared to securitize credit card receivables before year-end, but market sources said it is not clear whether the Los Angeles-based banking company will now do so. A spokeswoman for Security Pacific declined to comment on the outlook for asset-backed issues.

If it becomes clear that Congress will not soon slap a limit on credit card rates, yields on two-year credit-card-backed securities could drop to 75 to 80 basis points over Treasuries. But that would still be a bit more of a spread than had prevailed before the current contretemps.

Few market experts expect a full recovery. "Going forward, there's always going to be this concern that credit card rates will come down," said Bradley Langs, an assistant vice president at Kemper Securities.

CAPITAL

MONITOR

The Financial Accounting Standards Board issued a discussion memorandum asking for industry comments on how to recognize and measure financial instruments. The memorandum raises 10 broad questions about accounting for financial instruments, and comments are due by May 31, 1992.

The board's memorandum is the latest step in a five-year-old project to study the accounting treatment of financial instruments.

The board has already begun detailed studies of some broad issues - market value accounting for bank assets and liabilities, accounting for the impairment of loans, and hedging - as part of the project.

Fitch Investors Service became the latest rating agency to affirm its ratings on securities backed by credit card receivables despite moves by Congress to cap credit card interest rates. Standard & Poor's Corp. took the same step last week.

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