chapter  3
20 Pages

The path to impairment: do credit- rating agencies anticipate default events of structured finance transactions?

Matthias Bodenstedta∗, Daniel Röschb and Harald Scheulec aJudge Business School, University of Cambridge, Trumpington Street, CB2 1AG Cambridge, UK; bInstitute of Banking and Finance, Leibniz University of Hannover, Königsworther Platz 1, 30167 Hannover, Germany; cSchool of Finance and Economics, University of Technology, Sydney, PO Box 123, Broadway, NSW 2007, Australia

The global financial crisis (GFC) has led to a general discussion of the accuracy and declining standards of credit-rating agency ratings. Substantial criticism has been directed towards the securitisation market, which has been identified as one of the main sources of the crisis. This study focuses on the ability of rating agencies to adjust their ratings prior to impairments of structured finance transactions. We develop a new measure that quantifies a rating agency’s performance in advance of defaults. By analysing a large number of impaired transactions rated by Moody’s Investors Service, we find that rating quality deteriorated during the GFC. Furthermore, we identify tranche-specific and macroeconomic factors that explain differences in Moody’s performance.