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1、AbstractWeexamineratingbehaviouraftertheintroductionofnewregulationsregardingCreditRatingAgencies(CRAS)intheEuropeansecuritisationmarket.Employingalargesampleof12,469ABStranchesissuedbetween1998and2018,WeexaminetheinformationcontentofyieldspreadsofABSattheissuanceandcomparethepre-andpost-GFCperiods.

2、Wefindthattheregulato11rchangeshavebeeneffectiveintacklingconflictsofinterestbetweenissuersandCRAsinsecuritisation.Ratingcateringseemstohavedisappearedinthepost-GFCperiod.YetWeseelimitedeffectivenessonratingshopping.Itfollowsthatratingover-reliancemightbeanissue,especiallyforinvestorsofhigher-qualit

3、yABS.Keywords:Securitisation;asset-backedsecurities;creditratingagencies;ratingshopping;ratingcatering;ratinginflation;EuropeJE1.classification:G21;G28Non-TechnicalSummaryThe2008GlobalFinancialCrisis(GFC)revealedweaknessesoncreditratings,especiallythoseforstructuredfinancialproductssuchasasset-backe

4、dsecurities(ABS).Duringthepre-GFCperiod,creditratingswerebyfarthegreatestsinglefactorconsideredbyinvestorsindeterminingABSrisks(Adelino,2009;Covaletal.,2009b;Miihlmann,2012).ItiswelldocumentedthatmanyinvestorsboughtABSwithoutunderstandingthetrueriskexposureduringthisperiod(Bolton,FreixasandShapiro,2

5、012;KisgenandStrahan,2010;Mahlmann,2012).ItisarguedthatcreditratingsnotreflectingthetruerisklevelswasafundamentalweaknessintheABSprocessesinthepre-GFCperiodandplayedakeyroleinthegrowingfinancialinstabilitythateventuallyledtothecrisis(Covaletal.,2009a;BenmelechandDlugosz,2010).TheGFChasalsorevealedth

6、eexistenceofconflictsofinterestbetweenCRAsandtheirclients(i.e.issuers).Thereisempiricalevidenceofratingcateringinthesecuritisationmarketinthepre-GFCperiod(Heetal.,2012;EfingandHau,2015).ItisalsoarguedthatcompetitioninstructuredfinancialmarketsinflictedpressureonCRAstoawardhigherratingstogaincustomer

7、s(Griffinetal.,2013).CompetitionamongCRAscoulddiminishratingsquality(Golan,Parlour,andRajan,2011)andpromotesratingshoppingbyissuersresultinginratinginflation(Boltonetal.,2012).Inaddition,itisarguedthatCRAsaremorelikelytofacilitateratingfavoursduringfinancialmarketboomperiods,whenpotentialreputationa

8、ldamageislower(Bar-IsaacandShapiro,2013)andwheninvestorsaregenerallymoretrusting(Boltonetal.,2012).Thispaperinvestigatestheimpactofthepost-GFCregulatorychangesintheEuropeansecuritisationmarket.FollowingtheGFC,EUregulatorsproposedasetofrulesandguidelinestoreviveawell-functioningsecuritisationmarketan

9、densuringmarketconfidence(EUCommission,2018).Accordingly,asetofmeasureswereintroducedbytheEUCommissiontoregulateandSUPerViSeCRAs.ThenewCRAregulationisintroducedinthreestages,withthefirstimplementedin2009,focusingonreducingconflictsofinterestandimprovingratingmethodologies.In2011,inadditiontothecreat

10、ionofEuropeanSecuritiesandMarketsAuthority(ESMA),aregulator-andsupervisor-bodyforCRAswasintroduced.Finally,in2013,furtheramendmentsandanadditionalsetofmeasures(i.e.CRAIII)wereintroducedaimingatimprovingtransparencyandreducingratingover-reliance.Specifically,thenewregulationrequiredissuersofstructure

11、dfinancialproductstoobtaincreditratingsfromatleasttwoindependentCRASandmakethesepublic.WeexaminehowratingbehaviourshavechangedintheEuropeansecuritisationmarketaftertheintroductionofthesenewregulations.Employingalargesampleof12,469ABStranchesissuedbetween1998and2018,weexaminetheinformationcontentofyi

12、eldspreadsofABSatissuanceandcomparepre-andpost-GFCperiods.InitialyieldspreadsreflectallrisksconsideredbyinvestorswheninvestinginABSandanysuspicionofconflictsofinterestarefoundtobereflectedintheinitialpriceofthesecurities(Heetal.,2012;EfingandHau,2015).Weutilisetheexistenceofmultipleratingsandraringa

13、greementsbetueenCRAstoidentifytheexistenceofratingshoppingandratingcatering,respectively(Griffinetal.,2013;Heetal.,2012;2016).WefindthattheregulatorychangeshavebeeneffectiveintacklingconflictsofinterestbetweenissuersandCRAsinthestructuredfinancemarket.Ratingcatering,whichisadirectconsequenceofissuer

14、andCRAcollusion,seemstohavedisappearedaftertheintroductionoftheseregulations.Regardingratingshopping,Wefindthattheeffectivenessofthechangeshasbeenlimited.Wealsofindthatratingoverreliancemightstillbeanissue,especiallyforinvestorsofhigher-qualitybonds.1. IntroductionThe2008GlobalFinancialCrisis(GFC)re

15、vealedweaknessesintheexistingEuropeanUnion(EU)rulesoncreditratings,especiallythoseforstructuredfinancialproductssuchasasset-backedsecurities(ABS).TheinherentcomplexityintheABSmarketmakesitextremelychallengingforinvestorstoconductduediligenceonsuchinstruments,makingcreditratingsavitalsourceofinformat

16、ion.Indeed,duringthepre-GFCperiod,creditratingswerebyfarthegreatestsinglefactorconsideredbyinvestorsindeterminingABSrisks(Adelino,2009;Covaletal.,2009b;Mahlmann,2012).ItiswelldocumentedthatmanyinvestorsboughtABSwithoutunderstandingthetrueriskexposureduringthisperiod(Bolton,FreixasandShapiro,2012;KisgenandStrahan,2010;Miihlmann,2012).Unfortunately,itisnowclearthatintheyearsprecedingthefinancialcrisis,creditratingagencies(CRAs)failedtocompletelycapturetherisksinvolvedinABSm