Notching

What is 'Notching'

Notching is when rating agencies reduce their ratings on structured financial collateral based on ratings from another agency without rating the collateral themselves. Notching arises when collateral, such as mortgage backed securities (MBS), and other asset backed securities (ABS) are included within investment vehicles that are rated, such as collateralized debt obligations (CDOs).

BREAKING DOWN 'Notching'

A study by Greenberg Quinlan Rosner Research in early 2002 found that 67% of senior executives, working in structured finance, oppose the practice of notching, because they feel that it undermines competition. They feel that the two largest rating agencies employ notching to maximize their market share and undermine competition.

RELATED TERMS
  1. Additional Collateral

    Additional assets put up as collateral by a borrower against ...
  2. Collateral Value

    The estimated fair market value of an asset that is being used ...
  3. Cross Collateralization

    The act of using an asset that is currently being used as collateral ...
  4. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  5. Advance Rate

    The maximum percentage of the value of a collateral that a lender ...
  6. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
Related Articles
  1. Investing Basics

    A Primer On Collateralized Debt Obligation (CDOs)

    A collateralized debt obligation, or CDO, is a structured financial product backed by a pool of loans. When a retail or commercial bank approves loans such as mortgages, auto loans or credit ...
  2. Credit & Loans

    Come In With Collateral

    You need a loan during a market downturn but lenders are not co-operating. Don't give up; follow this guide to become an ideal borrower.
  3. Credit & Loans

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  4. Home & Auto

    What Is A Mortgage?

    A mortgage is a loan used to purchase a home, where the property serves as the borrower's collateral.
  5. Investing Basics

    Understanding Structured Finance

    Structured finance refers to a complex financial transaction involving large financial institutions and companies with unique needs.
  6. Trading Strategies

    How Does Securities Lending Work?

    Securities lending is the act of loaning a stock or other security to an investor or firm.
  7. Retirement

    Collateralized Debt Obligations: From Boon To Burden

    CDOs were to be Wall Street's boon - instead they went bust. Find out what went wrong.
  8. Markets

    The Return of CDOs After the 2008 Financial Crisis

    Learn how the market for CDOs is coming back after the 2008 financial crisis, and understand how the market for these products has changed.
  9. Professionals

    Asset-Backed Securities (ABS)

    CFA Level 1 - Asset-Backed Securities (ABS). Learn the various forms of asset-backed securities. Discusses how special purpose vehicles help enhance the credit quality of these issues.
  10. Entrepreneurship

    Using Collateral to Obtain a Loan for Your Small Business

    Learn what assets can be used as collateral for an asset-based loan, and find out best practices when seeking asset-based lending.
RELATED FAQS
  1. What is the difference between a collateralized debt obligation (CDO) and an asset ...

    Discover the relationships between asset-backed securities (ABS), collateralized debt obligations (CDOs) and mortgage-backed ... Read Answer >>
  2. Are all mortgage backed securities (MBS) also collateralized debt obligations (CDO)?

    Learn more about mortgage-backed securities, collateralized debt obligations and synthetic investments. Find out how these ... Read Answer >>
  3. When did people first start using collateral to secure loans?

    Read about the history of lending and collateral, including a time when an entire nation was pledged as collateral for all ... Read Answer >>
  4. What is the difference between asset-based lending and asset financing?

    In the most common usage, the terms "asset-based lending" and "asset financing" refer to the same thing. Asset-based lending ... Read Answer >>
  5. What is the difference between a collateralized mortgage obligation (CMO) and a collateralized ...

    Both collateralized mortgage obligations (CMOs) and collateralized bond obligations (CBOs) are similar in that investors ... Read Answer >>
  6. Can private investors benefit from collateralized debt obligations (CDO)?

    Learn who participates in the industry of collateralized debt obligations or CDOs. Get a general idea of how money is generated ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center