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Intensified competition and the impact on credit ratings in the RMBS market

Author

Listed:
  • van Breemen, Vivian M.
  • Fabozzi, Frank J.
  • Vink, Dennis

Abstract

In this paper, we empirically investigate the impact of intensified competition on rating quality in the credit rating market for residential mortgage-backed securities (RMBS) in the period 2017-2020. We provide evidence that competition between large credit rating agencies (CRAs) (Moody’s and Standard & Poor’s) and newer smaller ones (Dominion Bond Rating Service Morningstar and Kroll Bond Rating Agency) creates credit rating inconsistencies in the RMBS market. While a credit rating should solely represent the underlying credit risk of a RMBS, irrespective of the competition in the market, our results show that this is not the case. When competitive pressure increases, both large and small CRAs tend to adjust their rating standards (smaller CRAs react to large CRAs and vice versa). JEL Classification: G15, G21, G24, G28

Suggested Citation

  • van Breemen, Vivian M. & Fabozzi, Frank J. & Vink, Dennis, 2022. "Intensified competition and the impact on credit ratings in the RMBS market," Working Paper Series 2691, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222691
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    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    2. Bae, Kee-Hong & Kang, Jun-Koo & Wang, Jin, 2015. "Does Increased Competition Affect Credit Ratings? A Reexamination of the Effect of Fitch’s Market Share on Credit Ratings in the Corporate Bond Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(5), pages 1011-1035, October.
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    5. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 03-98, Wharton School Rodney L. White Center for Financial Research.
    6. John M. Griffin & Jordan Nickerson & Dragon Yongjun Tang, 2013. "Rating Shopping or Catering? An Examination of the Response to Competitive Pressure for CDO Credit Ratings," The Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2270-2310.
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    10. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 3-98, Wharton School Rodney L. White Center for Financial Research.
    11. Aysun Alp, 2013. "Structural Shifts in Credit Rating Standards," Journal of Finance, American Finance Association, vol. 68(6), pages 2435-2470, December.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    competitive pressure; credit rating agencies; rating quality;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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