An organization that evaluates the probability of default on debt securities traded in the market. The rating is essentially expressed in letters. This rating is essentially expressed by letters. AAA (triple A) stands for the highest credit rating and virtually no risk of default, C for poor credit rating, and D for virtually no risk of default. Numbers are sometimes used as an addition. This grading is decisive for the conditions that banks grant for loans to the respective company. Internationally, the two agencies Standard & Poor’s (S&P) and Moody’s are the leaders, with Fitch in third place. – As independent information brokers, rating agencies are able to express the complexity of corporate data, which is usually very difficult to understand, in a grade that is immediately comprehensible to everyone. In this way, they increase the efficiency of the financial markets. On the other hand, incorrect assessments can have serious consequences for investors and even for financial market stability. This was demonstrated by the turmoil on the mortgage market in the USA in the summer of 2007 (subprime crises, which triggered a global financial crisis). In this context, it was questioned whether rating agencies could at all assess the increasingly complicated financial instruments with a one-dimensional judgment – as is certainly sensible and convincing in the case of bonds. – In principle, however, it should be noted: Rating agency grades should merely supplement investors’ own risk assessments. They cannot and must not be a substitute for a broad-based risk assessment of their own. It should also be borne in mind that, given their fundamental focus on long-term (noncurrent), fundamental variables, the agencies’ ratings can hardly capture a short-term, market-driven downward movement. – What is certain is that rating agencies have amplified procyclicality in the past. Before the subprime crisis, ratings were obviously too favorable. In the course of the crisis, this was then suddenly corrected (corrected abruptly), causing many investors to panic sell. – Experience in recent years has also shown that premiums on credit default swaps (CDSs) anticipate rating assessments by the agencies. – The rating agencies’ downgrading of the creditworthiness of sovereign bonds of some euro area members in the summer of 2011 was loudly rebuked by many politicians. However, it has become clear that the downgrading was quite appropriate; and the scolding should be directed at the sometimes disastrous fiscal policies of the downgraded countries, rather than at the rating agencies, which denounce the circumstances that are dangerous for the EMU. – See credit rating, downrating, company short profile, portfolio insurance, product registration, rating service unit, rating grades, rating agency, legal requirements, shadow rating, triple A, underweight. – Cf. BaFin Annual Report 2003, p. 35 f. (supervisory rules of conduct for rating agencies), ECB Monthly Report May 2005, p. 102 (EU initiatives), p. 105 (Code of Conduct Fundamentals for rating agencies, developed by IOSCO), BaFin Annual Report 2004, p. 12 (Code of Conduct for rating agencies), p. 66 (role of rating agencies in the capital market), BaFin Annual Report 2005, p. 46 f. (registration, transparency), Deutsche Bundesbank Monthly Report of December 2006, p. 79 (prerequisites for regulatory recognition of an agency), BaFin Annual Report 2006, p. 39 f. (regulatory assessment), BaFin Annual Report 2007, p. 59 f. (international efforts to supervise rating agencies), ECB Monthly Report of May 2009, p. 115 (fundamental issues; assessment of various proposals; literature references), BaFin Annual Report 2008, p. 45 f. (efforts to supervise rating agencies; EU regulation brings registration requirement by September 2010), BaFin’s 2009 Annual Report, pp. 57 ff. (details on registration requirement; rotation principle: a rating agency may only issue ratings for one and the same company for a limited period of time; rating agencies from third countries; responsibilities of supervision), BaFin’s 2010 Annual Report, pp. 68 f. (implementation of supervision of agencies; revision of the CRA Regulation), p. 187 (more detailed explanations with regard to the Implementing Act on the EU Rating Regulation), pp. 212 f. (ongoing supervision; rules of conduct and organization), as well as the respective BaFin Annual Report, chapter “International Affairs” and chapter “Supervision of Securities Trading and Investment Business,” Financial Stability Report 2010, p. 119 (rating assessments by agencies exhibit greater stability compared with market-related indicators and thus have a less procyclical effect). BaFin Annual Report 2011, p. 85 f. (supervision of agencies), BaFin Annual Report 2012, p. 68 f. (further regulatory efforts; new regulation), BaFin Annual Report 2013, p. 34 (supervision and examination by BaFin), and the respective BaFin Annual Report, chapter “International Affairs.”
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
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