Credit Rating Agencies play a vital role in the financial market. These agencies may be in the form of companies, cities, non-profit organizations, or national governments. Its primary function is to provide relevant and assessed information to investors to help them generate a sound decision whether to accept or reject an investment. They also measure the creditworthiness of a bond or other debt securities issuer entity in order to protect the interest of the creditors. The overall function of these agencies is to make accurate assessments of companies as an investor and debtor.
Although credit rating agencies provide a great help in the financial market, they are not exempted from conflict and other ethical issues. Some of these are: (1) they sometimes mislead the investors by rating the structured financial products in an aggressive way (2) they sometimes provide an erroneous model and parameters thus failing to determine the correspondent risks of financial products; (3) corporate governance issues like failure of top management to value risk; and (4) they often use unsolicited ratings to gain market share.
A company that issues credit scores for individual credit-worthiness is generally called a credit bureau (US) or consumer credit reporting agency (UK). While here in the Philippines, there is only one domestic credit rating agency that was accredited by the Bangko Sentral ng Pilipinas and the Securities and Exchange Commission, and this the Philippine Rating Services Corporation (PhilRatings). It is a founding member of the Association of Credit Rating Agencies in Asia, which now counts twenty-five domestic credit rating agencies in the Asian region as its members. PhilRatings actively participates in the development of the Philippine capital market by implementing a national credit rating system.
The Bangko Sentral ng Pilipinas has approved the recognition of PhilRatings as a domestic credit rating agency for bank supervisory purposes. PhilRatings is thus the first domestic CRA to be accredited by the BSP. Eligibility criteria for recognition include, among others: a minimum 5-year track record in issuing reliable and credible ratings; a pool of experienced analysts; competent and experienced Board of Directors; an established rating methodology; and that the CRA has an established record of independence, objectivity, and transparency.
Investors make use of information from a single agency or from multiple rating agencies. Investors expect credit rating agencies to provide significant information based on significant analytical methods and accurate statistical measurements. Investors also expect their investee to abide by the rules and regulations set forth by governing bodies, and at the same time comply with reporting procedures through proper disclosures imposed by securities industry governing agencies. Through the analyses and assessments provided by various credit rating agencies, investors will have a better understanding in the risks and opportunities attached in their investment options and will be able to form an informed decision on what best investment venture to select.
For them, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit 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 a 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.
Most credit rating agencies follow one of two business models: "subscriber-based" business model and "issuer-pays" business model. The subscriber-based business model is where the CRA would not distribute the ratings for free but would instead only provide the ratings to subscribers to the CRA's publications. Subscription fees would provide the bulk of the CRA's income. The issuer-pays business model under this business model, while subscribers to the CRA's services are still provided with more detailed reports analyzing an issuer, these services are a minor source of income and most ratings are provided to the public for free.
The transactions that are taking place in the financial markets are very complicated, the role of these agencies is to minimize those conflicts and help establish a good relationship between two parties (investee - investor; debtor - creditor).--ban.^^
