The Impact of Regulatory Changes on Rating Shopping and Rating Catering Behavior in the European Securitization Market

Abstract

We examine whether rating shopping and rating catering behaviors two mechanisms associated with credit rating inflation remained prevalent in the European securitization market following the Global Financial Crisis (GFC) and the subsequent introduction of regulatory reforms targeting credit rating agencies (CRAs). Using a dataset of 12,469 asset-backed security (ABS) tranches issued between 1998 and 2018, we analyze the information content of yield spreads at issuance and compare patterns across pre- and post-reform periods. Our findings suggest that rating catering is no longer reflected in pricing after the reforms, while indicators of rating shopping persist, particularly among tranches with fewer published ratings. We also find continued signs of investor over-reliance on ratings, especially for high-quality ABS. These results are consistent with a shift in investor perceptions and market practices post-GFC, although the extent to which this shift reflects regulatory changes versus broader crisis-related adjustments remains open to interpretation.