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Credit Rating Agency

A credit rating agency is a company that rates the ability of a person or company to pay back a loan. The rating given by a credit rating agency is important because it affects the perceived risk element incorporated into interest rates that are applied to loans.

Interest rates are not the same for everyone, but instead are based on risk based pricing, a form of price discrimination based on the different expected costs of different borrowers, as set out in their crdit rating. Worldwide there exist more than 100 rating agencies.

The lowering of a credit score or grade by a corporate credit rating agency can create a vicious cycle, as not only interest rates for that company would go up, but many contracts it might have with financial institutions may have credit rating related clauses which may cause things to be repriced to less favorable terms, causing a large increase in expenses to that company, possibly causing it to become even less creditworthy. These "rating triggers" were instrumental in the collapse of Enron: since that time, major agencies have put extra effort into detecting these triggers and discouraging their use.

For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative crdit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, startup companies, hospitals and universities.

The social benefits are similar for both large organizations (rated by agencies like Moody's and S&P) and individual borrowers (rated by Fair Isaac, Experian and others). Recognizing their role in capital formation, many governments have attempted to jumpstart their domestic rating-agency businesses with various kinds of regulatory relief or encouragement. This may, however, be counterproductive, if it dulls the market mechanism by which agencies compete, subsidizing less-capable agencies and penalizing agencies that devote resources to higher-quality opinions.

Large corporate rating agencies like Standard & Poor's are critized for having too familiar a relationship with company management, possibly opening themselves to undue influence or the vulnerability of being misled. These agencies meet frequently in person with the management of many companies, and advise on actions the company should take to maintain a certain rtaing. Also, more generally, the largest agencies (Moody's and Standard & Poor's) are often seen as agents of soulless global capitalism and/or "Anglo-american" market forces.

Finally, because the rating agency business is itself reputation-based (why pay attention to a rating that isn't recognized by others in the market?), barriers to market entry are high, and the agencies are sometimes accused of being oligopolists. Of the large agencies, only Moody's is a separate, publicly-held corporation that discloses its financial results without dilution by non-ratings businesses. The high profit on Moody's revenues (>50% gross margin), which are consistent with the high barriers to entry, do nothing to allay market fears of monopoly pricing.

Credit Rating and Reporting Agencies

A.M. Best
Baycorp Advantage
Dun & Bradstreet
Equifax
• Experian
• TransUnion
Fitch Ratings
Moody's
Standard & Poor's
• Auto loan

See also:
• Online Credit and Loan Applications
• Foreclosure
• Patient Finance
• Charge Card
• Credit
• Credit Cards
• Credit Report
• Debit Card
• Personal Loans
• Payday Loan
• Credit reference agency
• Credit score
• Fair Credit Reporting Act
• Identity theft
• Structured Settlement
• Home Equity Loan - How to use Wisely

• Arsidian Introduces New Free Online Mortgage & Loan Calculator

This article is licensed under the GNU Free Documentation License.
It uses material from the Wikipedia article "Credit Rating Agency ".