Intensified Competition and the Impact on Credit Ratings in the RMBS Market

53 Pages Posted: 30 Jul 2022

See all articles by Vivian M. van Breemen

Vivian M. van Breemen

European Central Bank (ECB); Nyenrode Business University

Frank J. Fabozzi

Johns Hopkins University - Carey Business School

Dennis Vink

Nyenrode Business University

Date Written: July, 2022

Abstract

In this paper, we empirically investigate the impact of intensified competition on rating quality in the credit rating market for residential mortgage-backed securities (RMBS) in the period 2017-2020. We provide evidence that competition between large credit rating agencies (CRAs) (Moody’s and Standard & Poor’s) and newer smaller ones (Dominion Bond Rating Service Morningstar and Kroll Bond Rating Agency) creates credit rating inconsistencies in the RMBS market. While a credit rating should solely represent the underlying credit risk of a RMBS, irrespective of the competition in the market, our results show that this is not the case. When competitive pressure increases, both large and small CRAs tend to adjust their rating standards (smaller CRAs react to large CRAs and vice versa).

Keywords: competitive pressure, credit rating agencies, rating quality

JEL Classification: G15, G21, G24, G28

Suggested Citation

van Breemen, Vivian M. and Fabozzi, Frank J. and Vink, Dennis, Intensified Competition and the Impact on Credit Ratings in the RMBS Market (July, 2022). ECB Working Paper No. 2022/2691, Available at SSRN: https://ssrn.com/abstract=4176698 or http://dx.doi.org/10.2139/ssrn.4176698

Vivian M. Van Breemen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

Frank J. Fabozzi

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Dennis Vink

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

HOME PAGE: http://www.dennisvink.nl

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