Credit rating agency

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Rating agency credit ( CRA , also called ranking service ) is a credit rating company, which assesses the debtor's ability to repay debt by making payments interest on time and possible default. An institution can assess the creditworthiness of the issuer of obligation bonds, debt instruments, and in some cases, of the underlying debt servicers, but not from individual consumers.

The debt instruments assessed by CRA include government bonds, corporate bonds, CDs, municipal bonds, preferred stocks, and mortgaged securities, such as mortgage backed securities and guaranteed debt obligations.

The issuer of liability or securities may be a company, a special purpose entity, a state or local government, a non-profit organization, or a sovereign state. Credit ratings facilitate securities trading in the secondary market. It affects the interest rate paid by security, with a higher rating leading to lower interest rates. Individual consumers are assessed for creditworthiness not by credit rating agencies but by credit bureaus (also called consumer reporting agencies or credit reference agencies), which publish credit scores.

The value of credit ratings for securities is questionable. Hundreds of billions of the highest rated securities agencies were downgraded to junk during the 2007-08 financial crisis. Ratings downgrades during the 2010-12 European sovereign debt crisis were blamed by EU officials to speed up the crisis.

The credit rating is a highly concentrated industry, with ratings agency "Big Three" controlling about 95% of business rankings. Moody Investors Service and Standard & amp; Poor's (S & P) jointly controls 80% of the global market, and Fitch Ratings controls 15% further.

Video Credit rating agency

History

Initial history

As the United States begins to expand to the west and other parts of the country, so does the business distance to their customers. When businesses are close to those who buy goods or services from them, it is easy for merchants to give credit to them, because of their proximity and the fact that traders know their customers personally and know whether they will be able to pay them back. As the trading distance increases, traders no longer recognize their customers and become suspicious of giving credit to people they do not know for fear they can not pay back. The hesitancy of business owners to provide credit to new customers led to the birth of the credit reporting industry.

The trade credit agency - the precursor of today's rating agency - was established after the financial crisis of 1837. These agents assessed the merchant's ability to repay debt and consolidate this rank in the published guidelines. The first institution was founded in 1841 by Lewis Tappan in New York City. It was later acquired by Robert Dun, who published the first ranked guide in 1859. Another early agent, John Bradstreet, was formed in 1849 and published a ranking guide in 1857.

Credit rating agencies originated in the United States in the early 1900s, when ratings began to be applied to securities, particularly those associated with the rail bond market. In the United States, the construction of extensive rail systems has led to the development of corporate bond issues to finance them, and therefore the bond market is several times larger than in other countries. Bond markets in the Netherlands and the UK have been established much longer but tend to be small, and revolve around sovereign governments that are believed to honor their debt. The company was established to provide investors with financial information about the growth of the railway industry, including the publishing company Henry Varnum Poor, which produced publications that compiled financial data on the rail and canal industry. After the financial crisis of 1907, demand increased for independent market information, especially for independent analysis of credit worthiness of bonds. In 1909, financial analyst John Moody published a publication that focused solely on rail bonds. His ranking became the first widely publicized in an easily accessible format, and his company was the first to charge subscription fees to investors.

In 1913, Moody's ratings publication underwent two significant changes: it expanded its focus to include industrial and utility companies, and began using a mail-rating system. For the first time, public securities are assessed using a system borrowed from credit rating agencies, using letters to demonstrate their creditworthiness. In the next few years, antecedents of rating agencies "Big Three" were established. Poor's Publishing Company began publishing ratings in 1916, Standard Statistics Company in 1922, and the Fitch Publishing Company in 1924.

Post-Depression Era

In the United States, the rating industry grew and consolidated rapidly after the passage of Glass-Steagall's 1933 action and the segregation of securities business from banks. As the market grows beyond traditional investment banking institutions, new investors are once again calling for increased transparency, leading to the passage of new mandatory disclosure laws for issuers, and the establishment of the Securities and Exchange Commission (SEC). In 1936, the regulation was introduced to prohibit banks from investing in bonds determined by "recognized ratings manual" (the pioneer of credit rating agencies) to be "speculative investment securities" ("junk bonds", in modern terminology). US banks are allowed to hold only "investment grade" bonds, and that is the Fitch, Moody's, Poor's and Standard ratings that are legally determined by which bonds. The state insurance regulator agreed on similar terms in the next few decades.

From 1930 to 1980, their bonds and ratings were mainly relegated to American cities and American blue-chip industry companies. The international rating of "government bonds" shrank during the Great Depression into a handful of most creditworthy countries, after a number of default bonds issued by governments such as Germany.

In the late 1960s and 1970s, ratings expanded to commercial paper and bank deposits. Also during that time, the big agencies changed their business model by starting to charge bond issuers and investors. The reasons for this change include the increasingly growing rider problem associated with the increasing availability of cheap copiers and the increasing complexity of financial markets.

Rating agencies add gradation levels to their scoring system. In 1973, Fitch added plus and minus symbols to the existing letter-rating system. The following year, Standard and Poor's did the same thing, and Moody's started using numbers for the same purpose in 1982.

Growth of the bond market

The end of the Bretton Woods system in 1971 led to the liberalization of financial regulation and the global expansion of capital markets in the 1970s and 1980s. In 1975, SEC regulations began to explicitly refer to credit ratings. For example, the commission changed the minimum capital requirement for broker-dealers, allowing smaller reserves to higher rated bonds; Ranking will be performed by "nationally recognized statistics ranking organization" (NRSROs). This refers to the "Big Three", but within ten agencies (then six, due to consolidation) identified by the SEC as NRSRO.

Rating agencies also grew in size and profitability as the number of issuers accessing the debt markets grew exponentially both in the United States and abroad. In 2009 the worldwide bond market (total outstanding debt) reached about $ 82.2 trillion, in 2009 dollars.

1980s-present

Two economic trends in the 1980s and 90s that brought significant expansion to global capital markets were

transfers from "intermediated" financing (bank loans) to less expensive and long-term "disintermediated" financing (tradable and other fixed income securities), and
a global move away from country intervention and state-led industrial adjustments towards economic liberalism based on (among other) global capital markets and the long-standing relationship between government and industry weapons.

The more debt securities mean more business for Big Three agencies, which many investors rely on to assess the securities of the capital market. US government regulators also rely on rating agencies; they allow pensions and money market funds to buy only securities rated above a certain level.

A market for low-value, high-yield "junk" bonds bloomed in the late 1970s, extending securities financing to firms other than some big, well-established blue chip companies. Rating agencies also began to apply their ratings outside of bonds to counterparty risk, mortgage servicers performance risk, and price volatility of mutual funds and mortgage-backed securities. Ranking is increasingly being used in financial markets of developed countries and in "developing markets" of developing countries. Moodys and S & amp; P opens offices in Europe, Japan, and especially emerging markets. Non-American agencies are also developed outside the United States. Together with the largest US appraiser, a British company, two Canadians and three Japanese companies were listed among the world's "most influential" ranking agencies in the early 1990s by the International Finance Rating i>.

Structured finance is another growth growth area. "Financial engineering" of new "private-label" asset-backed securities - such as subprime mortgage-backed securities (MBS), secured debt bonds (CDO), "CDO-Squared", and "synthetic CDO" - make them "more difficult to understand and determine the price "and become a profit center for rating agencies. In 2006, Moody's earned $ 881 million in revenues from structured finance. As of December 2008, there were more than $ 11 trillion in structured financial debt circulating in the US bond market.

The Big Three publishes 97% -98% of all credit ratings in the United States and about 95% worldwide, giving them a considerable price strength. This and credit market expansion brought them a profit margin of around 50% from 2004 to 2009.

Because of the influence and profitability of CRA widespread, so are the surveillance and concerns about their performance and alleged illegal practices. In 1996, the US Department of Justice launched an investigation into the possibility of improper pressure on issuers by Moody's to win the business. Institutions were subjected to dozens of lawsuits by investors complaining of inaccurate ratings after the fall of Enron, and especially after the US subprime mortgage crisis and the financial crisis of the late 2000s. During the disaster, 73% - more than $ 800 billion - of all mortgage-backed securities that a credit rating agency (Moody's) had rated triple-A in 2006 were downgraded to junk status two years later.

The downgrades of European and US sovereign debt were also criticized. In August 2011, S & amp; P downgraded the triple-A rating from US securities. Since spring 2010,

one or more of the Big Three degraded Greece, Portugal and Ireland to "rubbish" status - a move that many EU officials say has accelerated Europe's sovereign debt crisis. In January 2012, amid continuing eurozone instability, the S & P downgraded nine eurozone countries, trimming France and Austria from their triple-A ranking.

Maps Credit rating agency

Role in the capital market

Credit rating agencies assess the relative credit risk of a particular debt securities or structured financial instrument and borrower entity (debt issuer), and in some cases the creditworthiness of the government and its securities. By serving as information intermediaries, CRA theoretically reduces information costs, increases the number of potential borrowers, and promotes liquid markets. These functions can increase the supply of risk capital available in the market and promote economic growth.

Use of ratings in the bond market

Credit rating agencies provide an assessment of the credit worthiness of bonds issued by corporations, governments, and asset-backed securities package makers. In market practice, significant bond issuance generally has ratings of one or two of the three major agencies.

CRA theoretically provides investors with independent evaluations and credit worthiness assessment of debt securities. However, in recent decades customers paying CRA primarily not yet securities issuers but buyers, increasing the issue of conflict of interest (see below).

In addition, rating agencies are responsible - at least in US courts - for losses incurred due to improper rank ratings only if it proves they know the ratings are wrong or show "excessive indifference to the truth". Otherwise, ratings are merely an expression of an informed opinion of an agent, protected as "free speech" under the First Amendment. As one of the rating agencies disclaimer, read:

Rating... is and should be interpreted solely as a statement of opinion and not a statement of fact or recommendation to buy, sell or hold any securities.

Based on amendments to the Dodd-Frank Act 2010, this protection has been removed, but how the law will be implemented must still be determined by the rules made by the SEC and the decision by the court.

To rank bonds, credit rating agencies analyze publisher accounts and legal agreements attached to bonds to produce what is effectively a forecast of possible default bonds, expected losses, or similar metrics. Metrics vary between agencies. The S & P rating shows the probability of default, while rating by Moody's reflects expected investor losses in case of default. For corporate liabilities, the Fitch rating incorporates measures of investor losses in the event of default, but its rating on structured, project and public financial liabilities narrowly measures default risk. The process and criteria for assessing convertible bonds are similar, although it is quite different that convertible bonds and bonds issued by the same entity may still receive different ratings. Some bank loans may receive ratings to assist in wider syndication and attract institutional investors.

Relative risk - ratings value - usually expressed through several variations of a combination of lowercase and uppercase alphabets, with plus or minus marks or numbers added to enhance further ratings.

Use of Fitch and S & amp; P (from the most creditworthy to the lowest) AAA, AA, A and BBB for long-term credit risk investment and BB, CCC, CC, C and D for "speculative" credit risk periods. Moody's long-term designers are Aaa, Aa, A, and Baa for investment classes and Ba, B, Caa, Ca, and C for the speculative class. Fitch and S & amp; P uses pluses and minuses (e.g., AA and AA-), and Moody usage numbers (e.g., Aa1 and Aa3) to add further gradations.

The agency does not include the number of harsh default probabilities to each level, preferring descriptive definitions, such as "the ability of the obligor to fulfill its financial commitments on very strong obligations," (from the Standard and Poor's definition of AAA bond rating) or "less prone to non-payment rather than other speculative problems "(for BB-rated bonds). However, some studies estimate the average risk and rewards of bonds by rating. One study by Moody's claims that during the "5-year time horizon", the highest rated bond (Aaa) has a "cumulative standard rate" of only 0.18%, next highest (Aa2) 0.28%, next (Baa2) 2.11% , 8.82% for the next (Ba2), and 31.24% for the lowest being studied (B2). (See "Default rate" in "Estimated spreads and default rate by rating ratings" table to the right.) Over a longer period of time, it states, "orders are generally, but not exactly, preserved".

Another study at the Journal of Finance calculated the additional interest rate or "spread" that corporate bonds paid more than US Treasury bonds "without risk", according to bond ratings. (See "Base points scattered" in the table to the right.) Looking at the rated bonds from 1973 to 1989, the authors found that AAA-rated bonds pay only 43 basis points (or 43/100 of more percentage points) than Treasury bonds ( so it will generate 3.43% if the Treasury bond yields 3.00%). The CCC (or speculative) "rubbish" bond, on the other hand, pays more than 4% more than the average Treasury bond (7.04% if Treasury bonds yield 3.00%) during the period.

Markets also follow the benefits of ranking resulting from government regulations (see below), which often prohibit financial institutions from buying securities with ratings below a certain level. For example, in the United States, in accordance with the two rules of 1989, pension funds are prohibited from investing in asset-backed securities rated under A, and savings and loan associations of investments in securities rated below BBB.

CRA provides "oversight" (continuous review of securities after their initial assessment) and may change the security rating if they feel that their credit worthiness has changed. CRA usually signifies their previous intention to consider a change of rank. Fitch, Moody's, and S & amp; P all use negative "prospect" notices to indicate potential downgrade within the next two years (one year in case of speculative class credits). A negative "watch" notification is used to indicate that a possible downgrade in the next 90 days.

Accuracy and responsiveness

Critics maintain that this rating, outlooking, and watching securities do not work as smoothly as suggested by the agency. They point to near-defaults, defaults, and financial crises undetected by post-issuance supervision of rating agencies, or ratings of troubled debt securities not lowered until before (or even after) bankruptcy. These include the 1970 bankruptcy of Penn Central, the 1975 New York City fiscal crisis, the 1994 Orange County default, the Asian and Russian financial crisis, the 1998 collapse of long-term hedge fund funds, the bankruptcy of Enron and WorldCom 2001, and particularly the 2007-8 subprime mortgage crisis.

In the 2001 Enron accounting scandal, the firm's ratings remained at investment levels up to four days before the bankruptcy - although Enron shares have fallen sharply for several months - when the "outline of fraudulent practices" was first revealed. Critics complain that "no analyst at Moody's of S & P loses his job for losing Enron's fraud" and "management remains the same". During the subprime crisis, when mortgage-backed securities worth Â¥ 30 billion dollars were suddenly downgraded from triple-A to "junk" status within two years of being released, CRA ratings are characterized by critics. "Misleading catastrophically" and "giving little or no value". The preferred stock rating also fared badly. Despite more than a year of rising mortgage debt burden, Moody's continued to assess Freddie Mac's triple-A preferred stock by mid-2008, when it was downgraded to one tick above the level of junk bonds. Some empirical studies have also found that instead of lowering the market price ratings and raising the interest rates on corporate bonds, the causes and consequences are reversed. Expanding the yield spreads (that is, the declining value and quality) of corporate bonds precedes the downgrade by agents, indicating it is a market that tells CRAs the problem and not the other way around.

In February 2018, an investigation by the Australian Securities and Investments Commission found insufficient detail and seriousness in many ratings issued by the agency. ASIC examined six agencies, including Australian weapons Fitch, Moody's and S & P Global Rating (other agencies are Best Asia-Pacific, Australia Ratings and Equifax Australia). It is said that the bureaus often pay lip service for compliance. In one case, an agency has issued an annual compliance report only one page long, with little discussion of the methodology. In other cases, a company chief executive has signed the report as if it were a board member. In addition, overseas rating agency staff have given credit ratings even though they do not have the required accreditation.

Explanation of deficiency

The defender of the credit rating agency complained of a lack of market appreciation. Robert Clow's argument, "When a sovereign company or country pays its debt on time, the market is hardly noticing... but letting a country or company suddenly lose its payments or threaten default, and bondholders, lawyers and even regulators are quick to hurrying the field to protest the credit analyst's irregularities. "Others say that low-rated credit ratings by rating agencies have proven to be more frequent than bonds that receive high credit ratings, suggesting that ratings still serve as useful credit risk indicators.

A number of explanations of inaccurate ratings and forecasts of rating agencies have been offered, especially after the subprime crisis:

The methodology used by the agency to assess and monitor securities may be inherently flawed. For example, a 2008 report by the Financial Stability Forum chose methodological shortcomings - especially inadequate historical data - as contributing to underestimating the risks in CRA's structured financial products prior to the subprime mortgage crisis.
The ranking process depends on subjective judgment. This means that governments, for example, that are being assessed can often inform and influence credit rating analysts during the review process
The interest of rating agencies in pleasing securities publishers, who are their paid subscribers and benefiting from high rankings, creates conflicts with their interest in providing accurate ratings of securities for investors who buy securities. Securities issuers benefit from higher rankings in many of their customers - retail banks, pension funds, money market funds, insurance companies - are prohibited by law or otherwise refrain from purchasing securities below a certain rank.
The rating agency may have experienced significant deficiencies during the subprime boom and therefore can not properly assess all debt instruments.
Agency analysts may be paid relatively low against similar positions in investment banks and Wall Street companies, resulting in the migration of credit rating analysts and in-depth knowledge of analysts about higher-paying job-ranking procedures in banks and companies that issue rated securities , and thus facilitate ratings manipulation by issuers.
The use of value functionally as a regulatory mechanism can improve the reputation of its accuracy.

Excessive power

In contrast, complaints have been made that firms overrule issuers and downgrades can even force troubled companies into bankruptcy. The downgrading of credit scores by CRA can create a vicious cycle and self-fulfilling prophecy: not only interest rates on securities increases, but other contracts with financial institutions can also be negatively affected, leading to an increase in funding costs and a decrease in creditworthiness. Large loans to companies often contain clauses that make full-blown loans if the company's credit rating is lowered beyond a certain point (usually from the level of investment to "speculative"). The purpose of this "rating trigger" is to ensure that the borrowing bank can claim a weak corporate asset before the company declares bankruptcy and the recipient is appointed to share the claim against the company. The effect of such ratings triggers, however, can be devastating: under the worst-case scenario, once the corporate debt is downgraded by CRA, the company's loan becomes fully due; if the company can not afford to pay all these loans in full at the same time, it is forced into bankruptcy (the so-called death spiral). These ratings trigger a role in the collapse of Enron. Since then, major agencies have gone the extra mile to detect them and discourage their use, and the US SEC requires public companies in the United States to disclose their whereabouts.

Law of reform

The Dodd-Frank Wall Street 2010 Reform and Consumer Protection Act mandate improved regulatory credit rating agencies and address some issues regarding the accuracy of credit ratings in particular. Under the Dodd-Frank rule, agencies should publicly disclose how their ranking has been conducted over time and should provide additional information in their analysis so that investors can make better decisions. The amendments to the law also stipulate that ratings are not protected by the First Amendment as freedom of speech but "are fundamentally commercial and subject to the same standard of liability and oversight as applicable to auditors, securities analysts and investment bankers." The implementation of this amendment proved difficult because of the conflict between the SEC and the rating agencies. The Economist's credit free speech magazine is at least partially in part to the fact that "41 legal action targeting S & D has been dropped or dismissed" since the crisis.

In the European Union, there is no specific law governing the contract between issuers and credit rating agencies. The general rules of contract law apply in full, though it is difficult to hold the agency accountable for breach of contract. In 2012, the Australian federal court held a Standard & amp; The poor are responsible for inaccurate ratings.

Use of rank in structured finance

Credit rating agencies play a key role in structured financial transactions such as asset-backed securities (ABS), mortgage backed securities (RMBS), commercial mortgage-backed securities (CMBS), secured debt bonds (CDO), "synthetic CDO", or derivative.

The credit ratings for structured financial instruments can be distinguished from the ratings for other debt instruments in several important ways.

This effect is more complex and accurate repayment estimates are more difficult than with other debt ratings. This is because they are formed by collecting debts - usually consumer credit assets, such as mortgages, credit cards or auto loans - and arranged by "slicing" the pool into several "tranches", each with different payment priorities. Tranches are often likened to buckets that capture flowing water, where monthly or quarterly water payments flow down to the next bucket (tranche) only if the above ones have been filled with full and overflowing parts. The higher the bucket in the income stream, the lower the risks, the higher the credit rating, and the lower the interest payments. This means higher levels have more creditworthiness than unconventional unstructured bonds, which are unstructured with the same revenue stream of payments, and allow rating agencies to assess triple A tranche or other high value. The securities are then eligible to be purchased by pensions and money market funds restricted to higher-grade debt, and for use by banks seeking to reduce expensive capital needs.
CRAs are not only paid to rank into structured securities, but can be paid for advice on how to organize a tranche and sometimes the underlying asset that secures debt to achieve the desired rating of the issuer. This involves interaction and analysis back and forth between sponsors of trust that issues security and rating agencies. During this process, the sponsor may propose the proposed structure to the agency for analysis and feedback until the sponsor is satisfied with the rankings of the various stages.
Credit rating agencies use various methodologies to assess structured finance products, but generally focus on the type of financial asset pool that underlies the security and proposed capital structure of trust. This approach often involves a quantitative assessment according to the mathematical model, and thus can introduce the risk level of the model. However, the bank model of risk assessment has proven to be less reliable than credit rating models, even on the basis of large banks with sophisticated risk management procedures.

Aside from the above mentioned investors - who are subject to rank-based constraints in buying securities - some investors simply prefer that structured financial products are ranked by credit rating agencies. And not all structured financial products receive credit rating agency ratings. Ratings for complicated or risky CDOs and some publishers create structured products that rely solely on internal analysis to assess credit risk.

Booming subprime mortgage and crisis

The Financial Crisis Investigation Commission has described the Big Three rating agency as a "key player in the process" of mortgage securitization, providing certainty to securities security to money-managing investors with "no history in the mortgage business".

Credit rating agencies began publishing ratings for mortgage backed securities (MBS) in the mid-1970s. In subsequent years, these ratings are applied to securities backed by other types of assets. During the first years of the twenty-first century, demand for high-value securities was highly valued. The growth was very strong and profitable in the structured finance industry during the 2001-2006 subprime mortgage boom, and businesses with the financial industry accounted for almost all revenue growth at least in one of the CRA (Moody's).

From 2000 to 2007, Moody's assessed nearly 45,000 mortgage-related securities as triple-A. In contrast, only the top six (private) companies in the United States are ranked.

Rating agencies are even more important in debt rating (CDO). These secured mortgage/asset securities are lower in "waterfall" payments that can not be assessed triple-A, but for whom the buyer must find or the rest of the mortgage pool and other assets can not be securities. Rating agencies solve problems by rating 70% to 80% of triple-A CDO sidewalks. Still another innovative structured product that most of the tranchenya also rated highly is "synthetic CDO". Cheaper and easier to make than regular "cash" CDOs, they pay premium payments like insurance from credit default swap "insurance", instead of interest and principal payments from a home mortgage. If an insured or "referenced" CDO fails, the investor loses their investment, which is paid away much like an insurance claim.

Conflicts of interest

But when it was discovered that a mortgage had been sold to a buyer who could not pay it, a large number of securities were downgraded, securitization was "confiscated" and a Great Recession took place.

Critics blame the low risk of securities effects on conflicts between the two interests of CRA - accurately assessing securities, and serving their customers, security publishers that require high ratings for sale to investors subject to rank-based restrictions, such as pension funds and life insurance companies. While these conflicts have been around for years, the combination of CRAs focus on market share and profit growth, the importance of structured financing for CRA profits, and pressure from issuers who began to 'get around' for the best ratings brought conflict to the head between 2000 and 2007.

A small number of structured financial product regulators - especially investment banks - drive large numbers of businesses to rating agencies, and thus have far greater potential to exert undue influence on ratings agencies than a debt-issuing company.

A 2013 Swiss Finance Institute study of the structured debt rating of S & P, Moody's, and Fitch found that agencies ranked better for structured products from issuers that gave them more business overall bilateral ratings. This effect was found specifically at the beginning of the subprime mortgage crisis. Alternative accounts of the institution's inaccurate rating before the crisis undermine conflict of interest factors and focus more on overweight in the rating ranking, stemming from a belief in their methodology and previous successes with subprime securitization.

After the global financial crisis, various legal requirements were introduced to improve the transparency of structured financial rankings. The EU now needs credit rating agencies to use additional symbols with ratings for structured financial instruments to differentiate them from other ranking categories.

Use of rating in state debt

Credit rating agencies also publish credit ratings for state borrowers, including national, state, city, and state-backed international entities. The borrower of the country is the largest debt borrower in many financial markets. Governments from both developed and developing countries borrow money by issuing government bonds and selling them to private investors, both overseas and domestically. Governments from developing countries and emerging markets may also choose to borrow from other governments and international organizations, such as the World Bank and International Monetary Fund.

State credit ratings represent ratings by rating agencies on the ability and sovereignty of the state to repay its debts. The ranking methodology used to assess the country's credit rating is generally similar to that used for corporate credit ratings, although the willingness of the borrower to pay back receives extra emphasis because the national government may be eligible for immunity under international law, resulting in a repayment obligation complicated. In addition, credit scoring reflects not only the risk of long-term default, but also short-term or short-term political and economic developments. Differences in intergovernmental sovereign ratings can reflect the various qualitative evaluations of the investment environment.

National governments may request credit ratings to generate investor interest and increase access to international capital markets. Developing countries often rely on strong state credit ratings to access funding in international bond markets. Once the rating for sovereignty has begun, the rating agency will continue to monitor the relevant developments and adjust its credit opinion.

An International Monetary Fund study in 2010 concluded that ratings are a pretty good indicator of sovereign-default risk. However, credit rating agencies were criticized for failing to predict the 1997 Asian financial crisis and the downgraded nations amid the turmoil. Similar criticisms came after recent credit ratings downgrades to Greece, Ireland, Portugal and Spain, although credit-rating agencies have begun to downgrade the eurozone countries before the eurozone crisis begins.

Conflicts of interest in assigning sovereign ratings

As part of the Sarbanes-Oxley Act of 2002, Congress ordered the US SEC to develop a report, entitled "Report on Roles and Functions of Credit Rating Agencies in Securities Market Operations" detailing how credit ratings are used in US regulations. and the issue of this usage policy increases. In part as a result of this report, in June 2003, the SEC issued a "release concept" called "Rating Agencies and Use of Credit Ratings under the Federal Securities Act" which requested public comment on the many issues raised in its report. Public comments on this concept release have also been published on the SEC website.

In December 2004, the International Securities Commission (IOSCO) issued a Code of Ethics for CRA which, among other things, was designed to address the types of conflicts of interest facing CRA. All major CRAs have agreed to sign this Code and have been praised by regulators ranging from the European Commission to the US SEC.

Used by government regulator

Regulatory authorities and legislative bodies in the United States and other jurisdictions rely on the assessment of credit rating agencies of various debt issuers, and thereby attach the function of regulation to their rank. The role of this arrangement is a derived function because the agency does not publish a rating for that purpose. Government bodies at both the national and international levels have leveraged credit ratings into minimum capital requirements for banks, allowed investment alternatives for many institutional investors, and similar restrictions for insurance companies and other financial market participants.

The use of credit ratings by regulatory agencies is not a new phenomenon. In the 1930s, regulators in the United States used a ratings agency credit rating to prohibit banks investing in bonds that are considered to be below investment level. In subsequent decades, state regulators underscored a similar role for agency ratings in limiting the investment of insurance companies. From 1975 to 2006, the US Securities and Exchange Commission (SEC) recognized the largest and most trusted institutions as a National Recognized Statistics Organization, and relied on them exclusively to distinguish between creditworthiness levels in various regulations at under federal securities laws. The Credit Rating Agency Reform Act of 2006 creates a voluntary registration system for CRA that meets certain minimum criteria, and provides the SEC with a broader supervisory authority.

The practice of using credit rating agency ratings for regulatory purposes has grown globally. Currently, financial market regulations in many countries contain extensive references to rankings. The Basel III Agreement, a global bank capital standardization effort, relies on credit ratings to calculate minimum capital standards and minimum liquidity ratios.

The extensive use of credit ratings for regulatory purposes may have a number of undesirable effects. Because regulated market participants must follow minimum investment requirements, a change in rank on the investment/non-investment boundary can lead to strong market price fluctuations and potentially cause a systemic reaction. The regulatory functions provided to credit rating agencies may also affect the functioning of their original market information in providing credit opinion.

Against this background and in the wake of criticism of credit rating agencies after the subprime mortgage crisis, legislators in the United States and other jurisdictions have begun to reduce the dependence of ratings in laws and regulations. The Dodd-Frank Act 2010 removes legal references to credit rating agencies, and asks federal regulators to review and change existing rules to avoid relying on credit ratings as the sole judgment on creditworthiness.

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Industrial structure

Three great agencies

As of December 2012, S & amp; P is the largest of the three, with 1.2 million outstanding ratings and 1,416 analysts and supervisors; Moody has an incredible 1 million rank and 1,252 analysts and supervisors; and Fitch is the smallest, with about 350,000 outstanding ratings, and is sometimes used as an alternative to S & P and Moody's.

The three largest agencies are not the only source of credit information. Many smaller rating agencies also exist, mostly serving non-US markets. All major securities firms have internal fixed income analysts that offer information about the risks and volatility of securities to their clients. And special risk consultants working in various fields offer credit models and preliminary estimates.

The concentration of market share is not a new development in the credit rating industry. Since the founding of the first institute in 1909, there have never been more than four credit rating agencies with significant market share. Even the 2007-08 financial crisis - where the performance of three rating agencies dubbed "horrendous" by The Economist magazine - led to a three-percent drop in share of just one percent - from 98 to 97%.

The reasons for the concentrated market structure are debated. One of the most widely quoted opinions is that the Big Three's historical reputation in the financial industry creates a high barrier to entry for newcomers. Following the enactment of the 2006 Credit Rating Agency Reform Act in the US, seven additional rating agencies gained recognition from the SEC as a nationally recognized statistical rating organization (NRSROs). While these other agencies remain special players, some have gained market share after the 2007-08 financial crisis, and in October 2012 some announced plans to join together and create a new organization called the Universal Credit Rating Group. The EU has considered establishing a state-backed EU-based institution. In November 2013, the credit rating organization of five countries (CPR Portugal, CARE Rating of India, South African GCR, MARC Malaysia, and SR Brazil Rank) jointly ventured to launch ARC Ratings, a new global agency touted as an alternative to the "Big Three".

Other credit rating agencies

In addition to "The Big Three" from Moody's, Standard & amp; Poor's, and Fitch Ratings, other agencies and rating agencies including:

DataPro Limited (Nigeria), Agusto & amp; Co. (Nigeria), AM Best (USA), Capital Intelligence Ratings Limited (CIR) (Cyprus), China Lianhe Credit Rating Co., Ltd. (China), China Chengxin Credit Rating Group (China), Credit Rating Agency Ltd. (Zambia), Credit Rating Limited (Bangladesh) Information, CTRIS (Hong Kong), Dagong European Credit Rating, DBRS (Canada) Dun & amp; Bradstreet (USA), Egan-Jones Rating Company (US), Global Credit Ratings Co. (South Africa) Ranking HR de MÃƒÆ' Ã‚ Â© xico, S.A. de C.V. (Mexico), Credit Rating Agency Pakistan Limited (PACRA) (Pakistan), ICRA Limited (India), Japan Credit Rating Agency, Credit Rating Agency JCR VIS (Pakistan), Kroll Bond Rating Agency (USA), Levin and Goldstein (Zambia), FashionFinance (Italy), Morningstar, Inc. (US), Rapid Ratings International (USA), RusRating (Russia), Universal Credit Rating Group (Hong Kong), Vedas (Russia, Australia, formerly known as Baycorp Advantage), Wikirating (Swiss, alternative ranking organization), Humphreys Ltd. (Chile, formerly known as Moody's partner in Chile), Credit Research Initiative (Singapore, nonprofit ranking provider), Research Spread (research and rating agencies independent credit, France), INC Rating (Poland).

Business model

Credit rating agencies generate revenues from various activities related to the production and distribution of credit ratings. The sources of income are generally the issuer of securities or investors. Most agents operate under one or a combination of business models: subscription model and publisher-pay model. However, agencies can offer additional services using a combination of business models.

Under the subscription model, credit rating agencies do not make their ratings available for free to the market, so investors pay subscription fees to access ratings. This revenue provides a major source of agency revenue, although agencies may also provide other types of services. Under the publisher-paying model, firms charge a fee to issuers to provide credit rating ratings. This revenue stream allows the issuer's credit rating agencies to rank them for free to the broader market, especially over the internet.

The subscription approach was a business model that prevailed until the early 1970s, when Moody's, Fitch, and finally Standard & amp; Poor adopt publisher-pay model. Several factors contribute to this transition, including increased investor demand for credit ratings, and use of information-sharing technologies - such as fax machines and copiers - that allow investors to freely share agency reports and reduce subscription requests. Today, eight out of nine nationally recognized statistical rating organizations (NRSRO) use publisher-pay models, only Egan-Jones maintains an investor subscription service. Smaller regional credit rating agencies may use one of the models. For example, China's oldest rating agency, Chengxin Credit Management Co., uses a publisher-paid model. Universal Credit Ratings Group, formed by Beijing-based Dagong Global Credit Rating, Egan-Jones of the US and Russian RusRatings, uses a pay-investor model, while Dagong Europe Credit Rating, another joint venture of Dagong Global Credit Rating, pay.

Critics argue that the publisher-pay model poses a potential conflict of interest because the agency is paid for by the organization for which they owe value. However, the subscription model also seems to have a disadvantage, as it limits the availability of ratings to pay investors. Issuer-paying CRA believes that a subscription-model may also be subject to conflict of interest due to pressure from investors with strong preferences on product ratings. In 2010 Lace Financials, a customer-paid agency later acquired by Kroll Ratings, was fined by the SEC for violating securities regulations for the benefit of its biggest customers.

The 2009 World Bank report proposes a "hybrid" approach in which issuers paying ratings are required to seek additional scores from third-party customers. Other proposed alternatives include a "public sector" model in which the national government is funding the rating fee, and the "swap-pay" model, in which the stock and bond markets pay for ratings. Multilingual collaborative models, such as Wikirating, have been suggested as a good alternative to both subscription and publisher-paying models, although this is a recent development in 2010, and has not been widely used.

Oligopoly is produced by regulation

Agents are sometimes accused of being oligopolists, due to high market entry barriers and reputable reputation-based business agencies (and the financial industry paying little attention to unrecognized ratings). In 2003, the US SEC submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of ratings agencies and credit issues including conflicts of interest.

Thinking institutions such as the World Pension Board (WPC) have stated that the norm of Ã¢ â‚¬ Å"committal capitalÃ¢ â‚¬ Basel II/III is preferred essentially by the central banks of France, Germany and Switzerland (while the US and Britain are a bit lukewarm) encourage the use of ready-made opinions generated by oligopolistic rating agencies

From large agencies, only Moody's is a separate, publicly held company that discloses its financial results without dilution by non-rating companies, and its high profit margins (sometimes more than 50 percent of gross margin) can be interpreted as consistent with the kind of expected returns in industries that have high barriers to entry. Renowned investor Warren Buffett describes the company as a "natural duopolist", with an "exceptional" price strength when asked by the Financial Crisis Investigation Commission about its 15% ownership of the company.

According to professor Frank Partnoy, CRA rules by the SEC and the Federal Reserve Bank have eliminated competition between CRA and market players forcibly forced to use the services of three major agencies, Standard and Poor's, Moody's and Fitch.

SEC Commissioner Kathleen Casey said that this CRA has acted like Fannie Mae, Freddie Mac, and other companies that dominate the market due to government action. When CRA gave a "very misleading rating, major rating agencies enjoyed their most profitable year over the last decade."

To solve this problem, Ms. Casey (and others like NYU professor Lawrence White) have proposed removing the NRSRO rule completely. Professor Frank Partnoy pointed out that regulators use the yields of the credit risk swap market rather than the NRSRO rating.

CRA has made competitive suggestions that will, in turn, add further regulations that will make market entry even more expensive than it is today.

Turkey to establish own credit ratings agency -report | Ahval

src: ahvalnews.com

References

src: www.careratings.com

External links

Office of Exchange Rate Commission
SEC: Risk Rating

Source of the article : Wikipedia

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Selasa, 05 Juni 2018

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