Rating performance and agency incentives of structured finance transactions
نویسندگان
چکیده
The mismatch between credit ratings of structured finance transactions and their true risks has been a source of the Global Financial Crisis which manifested in criticism of models and techniques applied by credit rating agencies (CRA). This paper provides an empirical study which assesses the historical performance of credit ratings for structured finance transactions and finds that CRAs do not include all factors explaining securitization impairment risk. In addition, CRA ratings for selected asset categories underestimate risk in origination years when the fee revenue is high.
منابع مشابه
Credit Ratings Accuracy and Analyst Incentives
The financial crisis has brought a new focus on the accuracy of credit rating agencies (CRAs). In this paper, we highlight the incentives of analysts at the CRAs to provide accurate ratings. We construct a model in which analysts initially work at a CRA and can then either remain or move to a bank. The CRA uses incentive contracts to motivate analysts, but does not capture the benefits if the a...
متن کامل3 The Credit Rating Crisis
By December 2008, structured finance securities accounted for over $11 trillion worth of outstanding U.S. bond market debt (35%). The lion’s share of these securities was highly rated by rating agencies. More than half of the structured finance securities rated by Moody’s carried a AAA rating—the highest possible credit rating. In 2007 and 2008, the creditworthiness of structured finance securi...
متن کاملStructured finance, acquisitions and debt agency
Modern corporations use complex debt instruments and pursue acquisitions. In order to analyze the properties of some of these contracts in the event of an acquisition, this paper considers a company that has an incumbent capital structure, comprising one of five practically important structured debt contracts. An opportunity for an acquisition comes along that was not ex-ante contractible. The ...
متن کاملThe Relationship between Issuance Spreads and Credit Performance of Structured Finance Securities
This paper analyzes the relationship between structured finance par coupon spreads at issuance and the securities' credit performance. Using structured finance securities including asset-backed and mortgage-backed securities and collateralized debt obligations issued in the U.S. during 1998-2004, we find spreads vary substantially by rating, over time, and across asset classes; the spreads on s...
متن کاملSelf-Interest, Altruism, Incentives, and Agency Theory
Many people are suspicious of self-interest and incentives and oppose motivating humans through incentives. I analyze the meaning of incentives in the logic of choice and argue that it is inconceivable that purposeful actions are anything other than responses to incentives. Money is not always the best way to motivate people. But where money incentives are required, they are required precisely ...
متن کامل