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Structured Debt Ratings: Evidence on Conflicts of Interest

Author

Listed:
  • Matthias Efing

    (HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research))

  • Harald Hau

    (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute))

Abstract

This paper tests for conflicts of interest in the rating process of asset- and mortgage-backed securities based on a new aggregation method for a deal's different tranche ratings. Controlling for a large set of determinants of credit risk, we find that credit rating agencies provide better credit ratings for the structured products of those issuers that provide them with more overall bilateral rating business. This effect is particularly pronounced in the run-up to the subprime crisis and for structured products with the worst collateral. Rating favors to the largest clients generate economically significant competitive distortion, foster issuer concentration and contribute to the"too big to fail" status of large issuer banks.

Suggested Citation

  • Matthias Efing & Harald Hau, 2013. "Structured Debt Ratings: Evidence on Conflicts of Interest," Swiss Finance Institute Research Paper Series 13-21, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1321
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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