127 4.1 Introduction The credit rating agencies (CRAs) and those identified as producers of credit roar tgi anngisz iant i tohnes U. Tn iht ee dc Sr et adtiet s r(aUt iSn) ga rme ar rekf eert r ec do nt ot i na us ensa ttioo nbael rdeoc omginniazteedd s bt ayt i tsht irceael m9 2a%j o ro fptlha ey ecrrse d–i tMr ao toi dn yg ’ss ,i nS tt ah ne dEaurrdo p&e aPno oUrn’ si o(nS &( EPU) ,) aanndd 9F 5i t%c h i n– twh he oU Sa sms iagrnkeedt (ESMA, 2020; SEC, 2020). This triopoly in combination with the way revenue is generated (i.e., issuer-pays revenue model) in the credit rating industry is one of tBhoel tpornoebtl eaml . , s2 0t h1a2t; cGroi tlidcssteoifnCaRnAdsHauragnuge, c2a0u2s0e)d. i n f l a te d c re d i t ra t i n g s ( s e e e . g . , 33,34 However, the new rules and regulations35 in the last decade created to stimulate competition in the residential mortgage-backed securities (RMBS) market, have aS cmt ua lal lel yr Cl eRdAt so (set .rgo. ,nDg oe mr ci on mi o pn eBt iot ni odn Raantdi nag mS eorrvei cl eevMe l oprlna iyni ng sgt fai re l(dD aBmR So )n ag ns tdCKRrAo sl l. Bond Rating Agency (KBRA)) have gained prominent market shares at the expense of S&P, Fitch, and Moody’s in the RMBS market. As a result, we are interested to learn to what extent intensified competition between new and traditional CRAs has impacted the quality of the RMBS ratings. Thus, in this paper we focus on the RMBS market for two reasons. First, the entry of smaller CRAs (DBRS and KBRA) to the credit rating market for RMBS offers a unique setting to empirically assess how intensified competition affects the rating quality of small and large CRAs. 33o o w b T t n a h i e i n n i t t n e h c r e o e l m s o t w e t o e o s f e t n C f g R u a A n g d s e i i n t s h g g e c e r o n a s e t t r i . n a I g s te s s d u e e r f r r v s o i cm c e a n o is fs r t e u h q e e u r s h e, s i r gt a h mt e h u s e t l r t c i t p r h e le a d n i c t r i r e n a d v t i e i t n s r g t a o t t r o i s n , o g w p s t h f i r i m l o e m i z a e t s t e t h h v e e e r i s a s a s l m u C e R e p A ti r s m i c ae e n ,d i o t s r is e e l i q e n c u t t i vh o a e n l el i y s n s t t u h ly e o , r s t ’ o e s to their liking, while the discarded CRAs only receive a minor contract-breaking fee. 34 That issuers are able to request and select a rating from several CRAs is argued as a conflict of interest as it mproetliivmaitneasryCRraAtsintgowgirllabnet sbeelettcetredrabtyintghse icsosmuepra. red to their competitors, to increase the probability that their 35E ag u e T r n o h c p e i e s e e a s n, r a e P n g a d u r l l t a i h a t m e io R e n n e s g t a u a s l n a t d t h i o o e f y n t ( h p E e e U r C t ) a o N i u n n o t c 2 o il 0 C o 1 f R 7 2 A / 1 2 s 4 M in 0 a c 2 y l u o 2 d f 0 e t 1 h t 3 e h a e E m u E r e u o n r p d o e i p a n e n g a Rn Pa e Ur g l n u ia i la o m t n i e , o n R n t e ( ag E n u C d l ) a o t N i f o o T n 1 h 0 (e E 6 C U 0 o ) / u 2 Nn 0 o c 0 i 9l 4 o 6 o f 2 n 1 / c 2 2 r 0 e D 1 d e 3 i c t e r o m a f t b t in h e g e r 2P0ro1t7ecotinonseAccutroitfiz2a0t1io0n. of 2017. The major US regulation is the Dodd-Frank Wall Street Reform and Consumer Chapter 4 - Intensified Competition and the Impact on Credit Ratings
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