Credit rating agency
A credit rating agency provides independent assessments, in the form of credit ratings, of the probability of default of companies, governments and the providers of of a wide range of financial instruments. Credit ratings have major impact on the availability and cost of credit for borrowers.
- "There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by downgrading your bonds. And believe me, it's not clear sometimes who's more powerful".
- (Thomas L. Friedman, in an interview with Jim Lehrer on Newshour, PBS television, Feb. 13, 1996).
Introduction: credit ratings
The term "credit" is used in this context in its sense of trustworthiness, and refers to the extent to which its subject can be trusted to be willing and able to comply with the terms of a financial contract. Assessments of individual creditworthiness (usually stated as "credit scores") are not undertaken by organisations known as credit rating agencies, and are not further referred to in this article. Credit rating agencies assess the creditworthiness of the issuers of debt instruments, including bonds issued by corporations and governments and mortgages and their derivatives, and they express their findings as alphabetically-coded "rating" categories such as AAA, AA, and BB. Credit ratings have been presented by the issuing agencies as statements of opinion, implying the absence of any legally-enforceable commitment to their reliability.
The credit rating agencies
The major credit rating agencies are located in the United States and are regulated by the United States Securities and Exchange Commission having satisfied the conditions required by that commission for their designation as "Nationally Recognized Statistical Rating Organizations" (NRSROs)[1]. They undertake "solicited ratings" for a fee at the request of the issuers of debt instruments, basing their assessments upon data supplied to them by the issuers. According to expert testimony to a Senate Committee they do not make any significant effort to verify that data [2]. They also undertake unsolicitated assessments at their own expense, using published data.
Notes and references
- ↑ Amendments to the Rules Relating to the Oversight of Nationally Recognized Statistical Rating Organizations, Securities and Exchange Commission, November 2009
- ↑ Testimony of Professor John H Coffee, given before the United States Senate Committee on Banking, Housing and Urban Affairs hearing on Examining Proposals to Enhance the Regulation of Credit Rating Agencies, Wednesday, August 5, 2009]