Race to the Bottom? Competition Among Rating Agencies in the European Structured Debt Market – Evidence from the CRA Regulation

Abstract

After analyzing the long-term credit ratings on European structured debt products before and after European Parliament’s introduction of Article 8d in June 2013, which aims to diversify the market by encouraging the use of small credit rating agencies, I find that the rating split between large and small rating agencies significantly drops. During the first half of the data sample (January 2011-May 2013) or prior to Article 8d’s introduction, the data show that the Big 3 assign on average ratings that are at least 2.5 notches more conservative than those of DBRS, the fourth-largest credit rating agency. In the second half of the data set (July 2013-May 2017) or post implementation of Article 8d, the rating split between the Big 3 and DBRS decreases by at least 1.5 notches. This implies that under heightened competition from smaller rating agencies like DBRS, the dominant credit rating agencies are more likely to engage in a “race to the bottom” and assign more lenient credit ratings to securities.