Credit Rating Agency
A Credit Rating Agency is a firm, institution or other legal entity that issues credit ratings on a professional basis. A rating agency typically publishes reports assessing the Creditworthiness of a borrower or legal entity, either generally or with respect to a specific obligation (A Credit Rating may be business specific or financial product specific).
Rating agency business models may according to the following dimensions:
- Solicitation: concerning who initiates the credit rating process (See Unsolicited Rating).
- Payment: concerning who pays for the rating process
- Information access: the amount of private (internal) information accessed
- Publication: the public availability of the rating opinion
- Profit or Non-profit: whether there is a profit motive in the issuance of ratings
Credit Rating Agencies may be active in any segment of finance where credit ratings are feasible and/or in demand by market participants. This includes among others:
- corporate ratings
- bond ratings (including strutured finance)
- project finance ratings
- financial institution ratings
- sovereign / sub-sovereign ratings
Approaches to producing credit ratings will vary but typically involve at least one Credit Analyst applying internal policies and procedures, employing elements of qualitative and quantitative analysis to produce a Credit Rating Proposal, which is then reviews by a Credit Rating Committee
- A Credit Rating Philosophy that articulates how the rating agency understands and interprets the various open ended questions involved in credit risk analysis.
- A Credit Rating Methodology documented in Credit Rating Criteria
- A concrete Credit Rating System
- In the US, recognition as Nationally Recognised Statistical Rating Organisation (NRSRO) by the Securities and Exchange Commission.
- In the EU, recognition as External Credit Assessment Institutions (ECAI) by the European Securities and Markets Authority (ESMA).
Relation to Credit Bureaus
- Rating Agencies typically focus on firms and similar legal entities which makes them distinct from Credit Bureaus which provide credit risk assessments for individuals
- Credit Ratings are usually employing a discrete Credit Rating Scale in contrast to the more granular Credit Score produced in retail credit risk assessments
Issues and Challenges
- Significant challenges revealed in the financial crisis of 2008
- High market concentration
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