Are Conservative Ratings More Accurate? An Evaluation and Comparison of RMBS Ratings

We compare the levels and accuracies of residential mortgage-backed securities (RMBS) ratings from S&P, Moody’s, Fitch, and DBRS and find the following. While DBRS ratings are the most conservative, they have the lowest discriminatory power of default risk in short-, intermediate-, and long-term horizons. In addition, DBRS ratings have little or no incremental predictive power for default beyond that of other CRAs on joint-rated RMBS. In contrast, S&P ratings are the most generous yet have the highest discriminatory power of default risk. The superior performance of S&P ratings can be attributed to a balanced trade-off between early warnings of default and false alarms. The findings highlight the differences between conservative ratings and accurate ratings.