Credit Rating Agency

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Credit Rating Agency

A company that provides investors with assessments of an investment's risk. The issuers of investments, especially debt securities, pay credit rating agencies to provide them with ratings. A high rating indicates low risk and may therefore encourage investors to buy a security. Additionally, banks may only invest in securities with a high rating from two or more credit rating agencies. The SEC recognizes 10 firms as credit rating agencies; Fitch, S&P, and Moody's are the three most prominent. However, the methods of credit ratings agencies have been subject to criticism. For example, most agencies gave high-risk mortgage-backed securities top ratings until they defaulted at the collapse of the housing bubble.
References in periodicals archive ?
Nothing new there, of course: as the author of this book notes, the ratings agencies have been subjected to criticisms, including 'regulatory capture', ever since they began.
The compromise is as follows: credit ratings agencies must fix three dates per year when they can issue unsolicited ratings, before 31 December of the previous year, Europolitics understands.
The ECB said that if bond issuers are allowed to switch credit rating agencies, ratings agencies could issue false ratings in order to gain more business.
The most promising proposal, outlined in a policy paper by David Raboy, an economic consultant to the congressional panel overseeing the bailout, envisions an independent clearinghouse to collect fees from securities issuers and assign bond offerings to ratings agencies at random.
2003), "Testing Conflicts of Interest at Bond Ratings Agencies with Market Anticipation: Evidence that Reputation Incentives Dominate", Federal Reserve Board of New York, December.
CNBS President/CEO Brian Hague agreed that national ratings agencies need to eliminate conflicts of interest like issuing ratings to paying customers.
If the ratings agencies have distorted their ratings simply because they wanted to gain lucrative fees, this could gravely undermine the credibility of the whole system of financial transactions.
For some observers, credit ratings agencies are an obvious suspect.
Ratings cannot substitute for collateral because ratings agencies have no legal authority to enforce capital requirements, restrict transactions that could diminish capital or otherwise cause alien reinsurers to maintain financial strength.
The Commission's proposal, published by Internal Market Commissioner Michel Barnier last November, is the third overhaul of ratings agencies since they were first regulated in 2009 (EC 1060/2009).
According to the new proposals, ratings agencies should have to review ratings at least annually and key rating-agency staff should not take up top jobs at an entity they helped to rate until 18 months after the rating.
All of this suggests that companies should begin now to educate analysts and ratings agencies about the coming changes and what they believe will be the important measures and standards that will emerge from the new reporting requirements.