Credit Rating Agency

From Open Risk Manual

Definition

A Credit Rating Agency is a firm, institution or other legal entity that issues credit ratings on a professional basis

Business Model

A credit rating agency assesses the Creditworthiness of borrowers either on an absolute standalone basis or in comparison with suitably defined peer group. A Credit Rating may be business specific or financial product specific.


Recognized Agencies

  • 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

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