Government Failure or Market Failure─ Is Rating Inflation the Critical Origin of 2008 Financial Crisis

• Main Authors: Chen, Li-Chun, 陳俐君
• Other Authors: Hwang, Chun-Sin
• Format: Others
• Language: en_US
• Published: 2019
• Online Access: http://ndltd.ncl.edu.tw/handle/epez2a

博士 === 國立清華大學 === 經濟學系 === 107 === In the aftermath of the global financial crisis in 2008, Credit Rating Agencies (CRAs) have been accused of assigning inflated ratings. It’s been generally believed that the agencies played a critical role in offering overly favorable evaluation of risky Asset-Backed Securities (ABSs) and providing investors with wrong information on the riskiness of various kinds of debt. The CRAs’ failure to publish verifiable information, critics argue, brought the U.S. financial system to its knees. Some researchers, such as Taylor (2009), Allen and Carletti (2010), say that the financial crisis had its origin in the loose monetary policy employed by the U.S. Federal Reserve, in large part because low interest rates are the most frequent cause of an asset bubble. Other researchers, such as Reinhart and Rogoff (2008), James Crotty (2009), Kotz (2009), Cabral (2013), believe that bubble of the Residential Mortgage Backed Securities (RMBSs) market should be attributed to the credit rating inflation. Neo-liberal capitalism, they argue, promotes the deregulation in the financial sectors, leading to high-leverage behaviors whereby rating inflation helps RMBSs to meet regulatory requirements and to be sold like hotcakes. This thesis focuses on the ongoing controversy over rating inflation, seeking to explain why the price mechanism hasn’t served the important function of information discovery in the RMBSs market. In this article, data were collected from the Bloomberg Terminal. This thesis use the data to provide comprehensive comparison between the corporate bond and RMBSs markets. The main part of this study is to conduct market share analysis of the “Big Three” CRAs—Standard and Poor’s (S&P), Moody’s, and Fitch Ratings. Meanwhile, we assess the rating gaps between initial ratings and re-ratings issued by the “Big Three”. The results show that government regulators have interfered with the price mechanism in the RMBSs market. This is the main reason why rating inflation has been a significant issue in the RMBSs market. This thesis confirms that rating inflation phenomenon only exists in the RMBSs market largely because that the CRAs have been in face of the specific government supervision and market structure. Therefore, the effort to further tighten government regulation in the financial sector doesn’t solve the problem. Instead, the best solution is to eliminate artificial barriers that prevent competition.