The Impact of Regulatory Changes on Rating Shopping and Rating Catering Behaviour in the European Securitisation Market

We examine whether rating shopping and rating catering behaviours, two sources of credit rating inflation, are still prevalent in the post-Global Financial Crisis (GFC) period after the introduction of new regulations regarding Credit Rating Agencies (CRAs) in the European securitisation market. Employing a large sample of 12,469 ABS tranches issued between 1998 and 2018, we examine the information content of yield spreads of ABS at the issuance and compare the pre- and post-GFC periods. We find that the regulatory changes have been effective in tackling conflicts of interest between issuers and CRAs in securitisation. Rating catering seems to have disappeared in the post-GFC period. However, our results show that rating shopping is still observed. Hence, the effectiveness of the regulatory changes has been limited. We also find that rating over-reliance might still be an issue, especially for investors of higher-quality ABS.