Rating Shopping or Catering?An Examination of the Response to Competitive Pressure for CDO Credit Ratings

Abstract

We examine whether "rating shopping" or "rating catering" is a more accurate characterization of rating agency interactions regarding collateralized debt obligations (CDOs) prior to the credit crisis. Although investors paid a premium for dual-ratings, AAA CDO tranches rated by both Moody's and S&P defaulted more frequently than tranches rated by only one of them, which is inconsistent with pure rating shopping. Even though AAA-rated tranche sizes were typically identical, there was considerable disagreement between S&P's and Moody's assumptions on default correlations and even collateral quality. Rating agencies made upward adjustments beyond their model outputs when their competitor had more lenient assumptions. Finally, although S&P's and Moody's adjustments and disagreements were not reflected in yields at issuance, they were reflected in subsequent rating downgrades, suggesting that rating agencies later reverted towards their initial models.

Sources of power of the Big Three credit rating agencies in international financial markets

“…Po części można to wytłumaczyć tym, że proces ratingowy jest czasochłonny, a w przypadku nagłych wydarzeń lub ogłoszenia istotnych informacji inwestorzy są zmuszeni podejmować błyskawiczne decyzje w celu zminimalizowania strat. Jednak nie można ignorować znaczenia utraty reputacji agencji w wyniku ujawnienia procederu kupczenia ratingami (Griffi n, Nickerson, Yongjun Tang, 2013).…”

Zarządzanie agencjami ratingowymi – zmodyfikowany model „emitent płaci”

“…Słaba konkurencja między kluczowymi agencjami ratingowymi może skutkować również zbyt wysokimi notami ratingowymi w stosunku do estymowanych wyników, czyli tzw. inflacją ocen ratingowych (Camanho, Deb, Liu, 2012;Becker, Milbourn, 2011: 493-514;Griffin, Nickerson, Tang, 2013: 2270-2310Bolton, Freixas, Shapiro, 2012: 85-111;Sangiorgi, Sokobin, Spart, 2009;Skreta, Veldkamp, 2009: 678-695). Niektórzy badacze, w tym Bolton, Freixas, Shapiro (2012: 85-111) sugerują, że inflacja ocen ratingowych nie jest efektem aktywności naiwnych inwestorów.…”

Analyst Promotions within Credit Rating Agencies: Accuracy or Bias?

“…Credit rating agencies have more than a century of experience rating corporate debt, providing a long history to draw from and ample time to solidify their rating practices. In contrast, the more recent introduction of structured finance products has been accompanied by multiple methodological changes and ex ante differences in the evaluation of credit risk across rating agencies (Griffin, Nickerson, and Tang (2013)), confounding the ability of researchers to identify analyst discretion. Finally, corporate bond ratings are the setting in which we might expect to find the strongest preference for accuracy from credit rating agencies, because the incentive to reward accurate ratings is arguably stronger for corporate bonds than for mortgage backed securities (Frenkel (2015)).…”