Finance & Loans

Institutional credit rating agencies

Almost 97 percent of institutional credit ratings come from three agencies; Standard and Poor’s (S&P), Fitch Ratings and Moody’s. They assign institutions including nation’s governments, organizations, companies, cities and many others with a rating. Rating grades vary from the highest “AAA” (Moody’s “Aaa”) to lowest issuer default rating of S&P and Fitch “D” (Moody’s lowest grade is “C”). This rating helps or harms institutions when establishing debt obligations. Many mistakenly think that they are same as those consumer credit rating agencies (Equifax, Experian and TransUnion) where individuals get their credit report and FICO Score, but they are not. Fitch Ratings were introduced in 1924 and S&P adopted the same. Moody’s uses a slightly different rating system. Agency ratings heavily weigh on one’s ability to borrow funds in the open market. In the wake of the financial crisis rating agencies are under fire for their excessive ratings.

In 2006, the Congress adopted the Credit Rating Agency Reform Act which required the Securities and Exchange Commission (SEC) to establish guidelines for qualifying rating agencies and gave the power to regulate. The more recent Dodd-Frank Wall Street Reform and Consumer Protection Act enhanced the SEC’s authority over rating agencies and asked the agency to create and implement number of new rules.