The Path to Impairment: Do Credit Rating Agencies Anticipate Default Events of Structured Finance Transactions?

Abstract

The Global Financial Crisis (GFC) has led to a general discussion of the accuracy and declining standards of credit rating agency ratings. Substantial criticism has been directed toward the securitisation market, which has been identified as one of the main sources of the crisis. This study focuses on the ability of rating agencies to adjust their ratings prior to impairments of structured finance transactions. We develop a new measure that quantifies a rating agency’s performance in advance of defaults. Analysing a large number of impaired transactions rated by Moody’s Investors Service, we find that rating quality deteriorated during the GFC. Furthermore, we identify tranchespecific and macroeconomic factors that explain differences in Moody’s performance.

Keywords: Anticipation Coefficient, Credit Rating Agencies, Rating Quality, Global Financial Crisis, Structured Finance Rating

JEL Classification: G01, G14, G24, G28