Study On Reliance On Credit Ratings Of Collateralized Debt Obligation In China

Overdependence on credit ratings of American investors and regulators mainly accounted for the outbreak of subprime crisis and also exacerbated the volatility of this crisis. At that time, regulators in China suspended the securitization pilot and reviewed its risk. But the development of securitization is an inevitable trend along with the development of financial market. Recently, the securitization filing system and negotiatory pledge-style repo system came true in succession. The amount issued and trading volume of securitization market must experience a rapid growth. Under this circumstance, reliance on ratings will gradually become more and more widely so that the risk will gradually accumulate. Thus we have to attach importance to reliance on ratings and adopt proper rhythm and appropriate measures to reduce it. Because Collateralized Debt Obligation (CDO) is the largest component of our securitization market and more complex, I will focus on the study about its reliance on ratings.I arrange the contents mainly through the following ideas. Firstly, basic principle is introduced. Then I study the general theory. Finally, I pursue more focused research based on China’s national conditions and CDO’s specificity. Hence I divide the contents into four parts. The first part introduces CDO and its rating related issues to illustrate CDO’s complexity, the important role played by credit rating agency in designing its structure and the less reliability of its rating. The second part discusses general reliance on ratings, international measures to reduce reliance and summaries the enlightenment to China. It points out that we should take proper rhythm and appropriate measures to reduce reliance on ratings step by step while avoid an obstacle to the development of local credit rating agencies. The third part analyzes China’s national conditions, the specificity of rating for CDO and the risk from reliance on ratings of CDO to pave the way for putting forward pertinence suggestions. The fourth part proves that reliance on credit ratings of CDO indeed exists by empirical analysis. At last, on the basis of the previous studies, it makes targeted suggestions to reduce the reliance on credit ratings of CDO in China.It concludes that regulators should gradually reduce introducing ratings to laws and regulations and establish double-rating system for CDO. Investors should establish and improve internal credit assessment system for CDO, distinguishing from other bonds. Issuers and credit rating agencies should emphasis information disclosure for CDO. At the same time, both regulators and investors should develop alternative credit risk criteria to assess the risk of CDO, especially market measures, to help judge the validity of ratings, reduce risk and realize the benign development of credit rating industry.