Securitization Rating Performance and Agency Incentives

HKIMR Working Paper No.18/2011

52 Pages Posted: 28 Jun 2011

See all articles by Daniel Roesch

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Multiple version iconThere are 3 versions of this paper

Date Written: June 28, 2011

Abstract

This paper provides an empirical study, which assesses the historical performance of credit rating agency (CRA) ratings for securitizations before and during the financial crisis. The paper finds that CRAs do not sufficiently address the systematic risk of the underlying collateral pools as well as characteristics of the deal and tranche structure in their ratings. The paper also finds that impairment risk is understated during origination years and years with high securitization volumes when CRA fee revenue is high.

The mismatch between credit ratings of securitizations and their underlying risks has been suggested as one source of the Global Financial Crisis, which resulted in the criticism of models and techniques applied by CRAs and misaligned incentives due to the fees paid by originators.

Keywords: asset-backed security, credit rating agency, collateralized debt obligation, economic downturn, fee revenue, forecasting, Global Financial Crisis, home equity loans, impairment, mortgage-backed security, rating, securitization

JEL Classification: G20, G28, C51

Suggested Citation

Roesch, Daniel and Scheule, Harald, Securitization Rating Performance and Agency Incentives (June 28, 2011). HKIMR Working Paper No.18/2011. Available at SSRN: https://ssrn.com/abstract=1873876 or http://dx.doi.org/10.2139/ssrn.1873876

Daniel Roesch

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule (Contact Author)

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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