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Structured Debt Ratings: Evidence on Conflicts of Interest

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  • Efing, Matthias
  • Hau, Harald

Abstract

This paper tests for conflicts of interest in the rating process of European 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

  • Efing, Matthias & Hau, Harald, 2013. "Structured Debt Ratings: Evidence on Conflicts of Interest," CEPR Discussion Papers 9465, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9465
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    Citations

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    Cited by:

    1. Morkoetter, Stefan & Stebler, Roman & Westerfeld, Simone, 2015. "Competition in the Credit Rating Industry: Benefits for Investors and Issuers," Working Papers on Finance 1505, University of St. Gallen, School of Finance, revised Feb 2016.
    2. repec:oup:ecpoli:v:32:y:2017:i:90:p:175-219. is not listed on IDEAS
    3. Markus K. Brunnermeier & Sam Langfield & Marco Pagano & Ricardo Reis & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2017. "ESBies: safety in the tranches," Economic Policy, CEPR;CES;MSH, vol. 32(90), pages 175-219.
    4. Martin Kuncl, 2016. "Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases," Staff Working Papers 16-46, Bank of Canada.
    5. repec:oup:rfinst:v:30:y:2017:i:9:p:3269-3304. is not listed on IDEAS
    6. repec:gam:jjrfmx:v:11:y:2018:i:2:p:24-:d:145854 is not listed on IDEAS
    7. repec:wsi:gcrxxx:v:05:y:2015:i:01:n:s2010493615500087 is not listed on IDEAS
    8. Efing, Matthias, 2015. "Arbitraging the Basel securitization framework: Evidence from German ABS investment," Discussion Papers 40/2015, Deutsche Bundesbank.
    9. Mariassunta Giannetti & José María Liberti & Jason Sturgess, 2017. "Information Sharing and Rating Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3269-3304.
    10. Morkoetter, Stefan & Stebler, Roman & Westerfeld, Simone, 2017. "Competition in the credit rating Industry: Benefits for investors and issuers," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 235-257.
    11. Michael R King & Steven Ongena & Nikola Tarashev, 2016. "Bank standalone credit ratings," BIS Working Papers 542, Bank for International Settlements.
    12. Baghai, Ramin & Becker, Bo, 2016. "Non-rating revenue and conflicts of interest," CEPR Discussion Papers 11508, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    conflicts of interest; credit ratings; ratings inflation; structured debt;

    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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