Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?

Credit rating agencies (CRAs) are accused of bearing a strong responsibility for contributing to the subprime crisis by having been deliberately too lax in the ratings of some structured products. In response to this accusation, CRAs argue that such an attitude would be too dangerous for them, since their reputation is at stake. The objective of this article is to examine the validity of this argument within a formal model: Are reputation concerns sufficient to discipline rating agencies?We show that the reputation argument only works when a sufficiency large fraction of the CRA income comes from other sources than rating complex products. By contrast when rating complex products becomes a major source of income for the CRA, we show that it is always too lax with a positive probability and inflates ratings with probability one when its reputation is good enough.We provide some empirical support for this prediction, by showing that ceteris paribus, the proportion of subprime residential mortgage-backed securities (RMBS) that were rated AAA by the three main CRAs indeed increased over the last eight years.We analyze the policy implications of our findings and advocate for a new business model of CRAs that we call the platform-pays model.     

私有信息、评级偏差和中国评级机构的市场声誉

考虑到评级机构拥有市场声誉的本质在于其可以通过扭曲评级从而对市场产生影响,本文分两步研究中国发行人付费评级机构的市场声誉:第一步,将信用评级对各种基本面因素进行回归,并以实际评级与回归预测值的差值作为评级偏差的量度。与既有文献相比,本文的重要改进是在基本面因素中引入了发债企业与各评级机构(分支机构)最短距离的均值和方差,这能较好地控制因发债企业私有信息可能造成的选择偏误。第二步,考察评级偏差和机构特征如何影响企业的发债成本。研究表明,中国评级机构作为一个整体具有显著的市场声誉,但各评级机构之间存在很大的差异性。最后,考虑到评级机构与发债企业在选址上可能会有集聚效应,我们基于高铁开通事件进行双重差分检验,研究表明本文结论是稳健的。     

Intensified Competition and The Impact on Credit Ratings in the RMBS market

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 is higher, both large and small CRAs tend to adjust their rating standards (smaller CRAs react to large CRAs and vice versa).     

信用评级变动能反映企业真实财务信息吗?——基于财务重述的视角

本文以2007-2018年拥有主体信用评级的A股上市公司为研究对象,利用企业财务错报在未来被重述这一场景,检验主体信用评级变动能否反映企业真实财务信息。研究发现,评级机构在发债企业财务错报年显著下调了主体信用评级,而在重述公告发布年没有上述现象,这表明主体信用评级下调反映了企业的真实财务信息。在控制内生性影响后,结论仍然成立。进一步研究发现,发债企业当期财务错报涉及盈余时,主体信用评级被下调的幅度更大,说明评级机构更加关注与盈余相关的财务信息。机制分析表明,评级机构维护自身声誉是主体信用评级变动能够反映企业真实财务信息的主要机制。此外,主体信用评级被下调还导致了资本市场投资者的负面反应。本文的研究结果为主体信用评级变动反映企业真实财务信息提供了直接的证据支持,揭示了主体信用评级的信息含量,也对理解中国情境下评级机构调整主体信用评级的行为动机提供参考。     

金融中介机构竞争的市场反应--来自信用评级机构的证据北大核心

目前已有研究认为金融中介机构竞争会带来市场效率的提高,本文利用2012-2017年债券市场的微观数据研究“发行人付费”模式评级机构之间的竞争对评级结果的影响。研究发现,评级机构竞争会导致评级结果膨胀与评级质量下降。进一步研究发现,当评级竞争加剧时,“发行人付费”模式的评级机构会对有较多业务联系的企业放松评级标准,给予更高信用评级。我们的研究也发现评级机构的外资背景、承销商的良好声誉和媒体关注均有助于减小“发行人付费”模式下评级机构竞争的负面影响。同时,债券市场评级竞争还存在对股票市场的溢出效应,评级竞争导致的评级质量下降也降低了股票市场的信息效率。这说明,“发行人付费”模式下的评级机构竞争会降低资本市场的信息效率,“投资者付费”模式的推广和评级行业的对外开放有助于改善国内评级行业的评级质量。本文的研究也为国内债券市场进一步发挥双评级、多评级以及不同模式评级的交叉验证作用提供了一定证据支持。     

Reputation,Information, and Herding in Credit Ratings: Evidence from CMBS

The Journal of Real Estate Finance and Economics - We find strong evidence of herding behavior among credit rating agencies (CRAs) in the CMBS market. CRAs are more likely to change their rating if...     

Political similarities in credit ratings

We investigate whether political similarities between credit rating agencies (CRAs) and bond issuers impact credit rating quality. We find that a higher degree of similarity of political affiliation leads to a decrease in timeliness and accuracy of downgrades prior to default events. Our finding supports the notion that CRAs tend to maintain/assign preferential ratings to politically similar firms via delaying negative signals as favourable rating activities. We further show that these politically similar firms tend to increase the proportion of donations to their favoured party following favourable credit ratings. Interestingly, this result is confined to Republican-leaning firms. The results indicate that CRAs successfully use biased credit ratings as an indirect channel of political party support. Our findings support the political similarities in credit ratings hypothesis.     

Understanding credit ratings quality: Evidence from UK debt market participants

This study seeks to identify: (i) the demand for corporate bond ratings provided by credit ratings agencies (CRAs); (ii) how issuers select CRAs; and (iii) to better understand ratings quality, a term widely used by commentators, politicians and regulators, but under-explored in the academic literature. Interviews identify the principal source of demand for rating information is to reduce agency conflicts between issuers and investors. Issuers typically engage between one and three credit ratings agencies to rate their debt, implying a heterogeneous demand for ratings services, and different levels of ratings quality. However, ratings quality extends beyond competence and independence to include factors relating to professional judgment, communication, transparency, and the quality and continuity of analytic staff. Findings were discussed in the light of the ongoing international policy debate concerning CRAs.     

A Theoretical and Empirical Review of the EU Regulation on Credit Rating Agencies: In Search of Truth,Not Scapegoats

The undergoing financial turbulence has raised significant concerns over the role that credit rating agencies (CRAs) played in the inception, magnification and expansion of the crisis. In response, the EU legislature has adopted Regulation 1060/2009, which, for the first time, set out a legally binding pan‐European authorization regime for CRAs, which issue ratings that have been used by EU‐based financial institutions. As the turmoil turned into an unprecedented Eurozone debt crisis, EU politicians have been calling for tighter regulation of the credit rating industry. Drawing on the relevant empirical and theoretical research and building upon a comparative study of the corresponding US framework, the paper discusses critically the principles underlying EU Regulation 1060/2009 and the most recent suggestions for its reform. The paper argues that although, overall, the EU Regulation seems to be a well‐balanced instrument in the sense that it introduces the essential checks upon CRAs’ behavior while avoiding excessive regulatory intervention, more fine‐tuning is needed in certain fields, including, rating shopping, financial ties with rated entities, abuse of inside information, transparency and CRAs’ accountability.     

U.S. Monetary Policy and International Bond Markets

This paper analyzes how U.S. monetary policy affects the pricing of dollar‐denominated sovereign debt. We document that yields on dollar‐denominated sovereign bonds are highly responsive to U.S. monetary policy surprises—during both the conventional and unconventional policy regimes—and that the passthrough of unconventional policy to foreign bond yields is, on balance, comparable to that of conventional policy. In addition, a conventional U.S. monetary easing (tightening) leads to a significant narrowing (widening) of credit spreads on sovereign bonds issued by countries with a speculative‐grade credit rating but has no effect on the corresponding weighted average of bilateral exchange rates for a basket of currencies from the same set of risky countries; this indicates that an unanticipated tightening of U.S. monetary policy widens credit spreads on risky sovereign debt directly through the financial channel, as opposed to indirectly through the exchange rate channel. During the unconventional policy regime, yields on both investment‐ and speculative‐grade sovereign bonds move one‐to‐one with policy‐induced fluctuations in yields on comparable U.S. Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and tightenings and find no evidence of such asymmetry.     

The Credit Ratings Game

The collapse of AAA‐rated structured finance products in 2007 to 2008 has brought renewed attention to conflicts of interest in credit rating agencies (CRAs). We model competition among CRAs with three sources of conflicts: (1) CRAs conflict of understating risk to attract business, (2) issuers' ability to purchase only the most favorable ratings, and (3) the trusting nature of some investor clienteles. These conflicts create two distortions. First, competition can reduce efficiency, as it facilitates ratings shopping. Second, ratings are more likely to be inflated during booms and when investors are more trusting. We also discuss efficiency‐enhancing regulatory interventions.     

When do stock analysts find bond rating changes informative?

Credit rating agencies (CRAs) have considerable privileged access to corporate management and are therefore a potentially important source of information to the equity market. We study how stock analysts incorporate bond ratings in their earnings forecasts. We develop an economic framework to explain why equity analysts might look to CRAs as an information source, especially after Regulation Fair Disclosure. Using this framework, we characterize the association between ratings changes and earnings forecast revisions surrounding these changes. We examine whether the extent to which equity analysts glean information from ratings changes is related to the extent and importance of information conveyed in the ratings change and analysts’ information uncertainty. We find that characteristics we examine are strongly related to stock analysts’ use of information in rating downgrades.     

Information effect of entry into credit ratings market: The case of insurers' ratings

The paper analyzes the effect of competition between credit rating agencies (CRAs) on the information content of ratings. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant designs a rating scale distinct from that of the incumbent. It targets higher-than-average companies in each rating grade of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's (S&P) entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings. The empirical analysis reveals that S&P required higher standards to assign a rating similar to the one assigned by A.M. Best and that higher-than-average quality insurers in each rating category of A.M. Best chose to receive a second rating from S&P.     

Monetary policy news and exchange rate responses: Do only surprises matter?

We use data from the Federal Funds Futures market to show that exchange rates respond to only the surprise component of an actual US monetary policy change and we illustrate that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false rejection of the hypothesis that monetary policy impacts exchange rates. Unlike the recent contributions to the literature on exchange rates and monetary policy news, our testing method avoids the imposition of assumptions regarding exchange rate market efficiency. We also add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.     

Monetary conservatism and fiscal policy

Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic, stochastic sticky-price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment generates too much inflation. A conservative monetary authority thus remains desirable. When fiscal policy is determined before monetary policy each period, the monetary authority should focus exclusively on stabilizing inflation. Monetary conservatism then eliminates the steady state biases associated with lack of monetary and fiscal commitment and leads to stabilization policy that is close to optimal.     

Risk premia,asset price bubbles,and monetary policy

We develop a dynamic general equilibrium asset pricing model with heterogeneous beliefs to study the effects of monetary policy on prices, risk premia, asset price bubbles, and financial stability. We propose a new framework for monetary policy with respect to bubbles. Because bubble risk premia arise from an interaction between disagreements among investors and dynamic trading constraints, under a non-accommodative monetary policy, liquidity adjusted risk and bubble risk premia increase. What matters for policy is the trading constrained fraction/mass of agents that disagree about fundamentals (i.e. optimists/pessimists). Accommodative policy can lead to a larger fraction of trading constrained agents that disagree, larger bubbles, and increased systemic risk. An implication of our results is that accommodative monetary policy in response to the Covid-19 crisis does not increase systemic risk due to asset price bubbles, as long as the policy keeps inflation under control.     

Does reputation matter? Evidence on spatial competition in China's bond market

This study investigates the effect of market competition on the reputational concerns of credit rating agencies (CRAs) in the Chinese bond market. We find credit ratings increase when the market share distance between an incumbent CRA and its closest peer competitor decreases. This spatial competition effect only exists at the provincial level. We also find the market competition deteriorates the ability of ratings to predict future bond defaults, while the correlation between credit ratings and market-implied credit spreads is unaffected. Our findings suggest that because of the market inefficiency in emerging economies, CRAs privilege current profits over reputational concerns.     

Divergence in credit ratings

During the recent credit crisis credit rating agencies (CRAs) became increasingly lax in their rating of structured products, yet increasingly stringent in their rating of corporate bonds. We examine a model in which a CRA operates in both the market for structured products and for corporate debt, and shares a common reputation across the two markets. We find that, as a CRA’s reputation becomes good enough, it can be optimal for it to inflate its ratings with probability one in the structured products market, but inflate its ratings with probability zero in the corporate bond market.     

Consolidation in banking and the lending channel of monetary transmission: Evidence from Asia and Latin America

This paper examines the relationship between increased consolidation in banking and monetary policy transmission in eighteen Asian and Latin American economies, using bank-level data from 1996 to 2006. Our results provide consistent evidence that as concentration in banking increases, the bank lending channel is weakened, leading the monetary policy transmission mechanism to be less effective. We also investigate how this relationship between concentration and the strength of the lending channel depends on bank-specific characteristics. Using bank-level balance sheet and income statement data allows us, first, to better identify the effects of banking consolidation on the supply-side bank lending channel from those of the demand-side interest rate channel, and second, to test for any systematic differences in the impact of consolidation on monetary policy transmission across banks of different size and financial strength. We also discuss potential explanations for and policy implications of the main findings of this paper.     

International monetary policy spillovers through the bank funding channel

In this paper, we examine the international transmission of monetary policies of major advanced economies (US, UK, euro area) through banks in Austria and Germany. In particular, we compare the role of banks’ funding structure, broken down by country of origin as well as by currency denomination, in the international transmission of monetary policy changes to bank lending. We find weak evidence for inward spillovers through a bank funding channel. The more a bank is funded in US dollars, the more its domestic real sector lending is affected by monetary policy changes in the US. This effect is more pronounced in Germany than in Austria. We do not find evidence for outward spillovers of euro area monetary policy.