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

Vivian M. van Breemen, Frank J. Fabozzi and Dennis Vink

No 2691, Working Paper Series from European Central Bank

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

Keywords: competitive pressure; credit rating agencies; rating quality (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222691

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