Credit rating agencies are institutions that have been on the market since the beginning of the last century. These institutions play an important role in financial and investment markets: they deal with rating, ie assessing the creditworthiness and solvency of business entities, such as banks, companies, governments and state organizations. Credit rating agencies analyze the data, and based on that they assess and issue an opinion on the solvency of entities (their creditworthiness). There are several global rating agencies on the market. therefore it is safer to assume that these institutions only provide opinions. What else is worth knowing about them?The use of the services of credit rating agencies is not always profitable and brings a real, independent assessment of the financial stability of a given economic entity,
The scope of activities of rating agencies – what do these institutions do?
Credit rating agencies collect information about individual business entities, such as banks, companies, various types of companies, government institutions and countries, and after analyzing data assess the risk of their insolvency. Rating agencies issue ratings for the surveyed entities: the highest is AAA (low risk of insolvency) and the lowest is D (insolvent – bankrupt), in total there are approx. 20 (such assessments will tell whether a company, company or bank from which services we want to take advantage of, they have no financial problems, and we as clients can give them our own money without worrying about their possible loss).
The assessment of the credibility of the entities is the ability to repay financial obligations on time.The rating, which is both an assessment and an opinion,is an important determinant not only for other business entities, but also for financial markets, where there is a great demand for credibility assessments. Credit rating agencies check the risk associated with investing in bonds of selected companies and companies operating on the market. These institutions have a significant impact on the prices of financial products: a high rating issued by a rating agency increases the demand for a given product, thanks to which the profit of the entity offering this product increases.
Credit rating agencies are private, commercial companies that charge fees for reviews and ratings. Therefore,These institutions have a significant impact on the prices of financial products: a high rating issued by a rating agency increases the demand for a given product, thanks to which the profit of the entity offering this product increases. Credit rating agencies are private, commercial companies that charge fees for reviews and ratings. Bank ratings deserve special attention. Entities that invest high-value funds in them are not in practice covered by the Bank Guarantee Fund guarantee.
Well-known rating agencies
Virtually the entire global market for rating services belongs to the so-called “Big Three”, ie the three largest and most popular rating agencies. These include WeKnow Ratings Corp., Lodi’s Investors Service Inc. and Seen Power’s Rating Services. These institutions have been operating since the beginning of the 20th century, and each of them operates independently and has its own rating system. Other well-known rating agencies are Dominance Rating Service and AM Best.
Risk related to rating
Credit rating agencies are funded by their principals (companies, banks, organizations, etc.), which is why they are under pressure to give high marks to the reviewed products (honest and current assessment consistent with the facts could cause that customers using a given rating agency will give up its rating services to a competitive agency). This situation also affects the credibility and independence of the assessments made by credit rating agencies: they are only an opinion provider and, unfortunately, you cannot always rely on their assessments. Credit rating institutions as private companies and opinion-forming bodies cannot be held responsible for incorrect assessments and opinions (based on such ratings, we can be exposed to huge losses, and we cannot claim compensation or return the money invested).
Who uses the services of rating agencies?
Various economic entities use the services of rating agencies: banks, companies, companies, governmental and non-governmental organizations, as well as countries. Often, when choosing an account and credit in a particular institution, we check its economic situation. The most controversial is the rating of countries – their solvency depends on their debt (if in a few months the country debt increases significantly the possibility of paying off the debt decreases in such situations, rating agencies lower the rating of a given country. At the beginning of the year, one of the world rating agencies downgraded Poland for the first time in history.