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This paper provides an empirical study, which assesses the historical performance of credit rating agency (CRA) ratings for securitizations before and during the financial crisis. The paper finds that CRAs do not sufficiently address the systematic risk of the underlying collateral pools as well as characteristics of the deal and tranche structure in their ratings. The paper also finds that impairment risk is understated during origination years and years with high securitization volumes when CRA fee revenue is high. The mismatch between credit ratings of securitizations and their underlying risks has been suggested as one source of the Global Financial Crisis, which resulted in the criticism of models and techniques applied by CRAs and misaligned incentives due to the fees paid by originators.

Securitization Rating Performance and Agency Incentives