Credit Ratings across Asset Classes: A Long-Term Perspective
Kimberly Rodgers Cornaggia
Pennsylvania State University - Department of Finance
Rice University - Jesse H. Jones School of Management
November 10, 2015
In response to defaults among highly-rated structured finance products, regulators aim to standardize ratings across security types. We explore the economic challenges to this goal. Our contribution to the literature is a comprehensive examination of ratings quality across asset classes over a 30-year period. The divergent ratings behavior during the crisis was extreme, but not an isolated incident. We show that ratings exhibit persistent differences consistent with variation in rating agency incentives and underlying risk profiles across asset classes. We conclude that rules requiring ratings to perform comparably across asset classes will prove difficult to enforce. We advocate instead a regulatory framework that better distinguishes risk across asset classes. Our results should inform banks and regulators building on the Basel framework.
Number of Pages in PDF File: 56
Keywords: Credit Ratings, Credit Standards, Rating Agency, Ratings Comparability, Regulatory Capital
JEL Classification: D82, D83, G14, G24, G28
Date posted: August 15, 2011 ; Last revised: November 11, 2015
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