Credit Rating Agreement

The use of credit ratings by regulators is not a new phenomenon. [161] In the 1930s, U.S. regulators used credit ratings from credit rating agencies to prohibit banks from investing in bonds classified below the level of investment. [92] Over the following decades, state regulators outlined a similar role for agency ratings in limiting insurance companies` investments. [92] [161] From 1975 to 2006, the Securities and Exchange Commission (SEC) recognized the largest and most credible agencies as nationally recognized statistical rating agencies and relied exclusively on these agencies to distinguish between credit quality levels in different provisions of the Federal Credit Securities Act. [161] [165] The Credit Rating Agency Reform Act of 2006 created a voluntary registration system for credit rating agencies that met certain minimum criteria and gave the SEC broader supervisory power. [166] The credit rating agency should comply with the guidelines, instructions, circulars and sebi instructions issued from time to time. When the U.S. began to expand westward and other parts of the country, it also made the distance between businesses and their customers. If businesses were close to those who bought goods or services from them, it was easy for merchants to give them loans, due to their proximity and the fact that merchants personally knew their customers and knew whether or not they could repay them. As commercial distances increased, merchants no longer knew their customers personally and became cautious about lending to people they did not know, fearing that they would not be able to repay them. The reluctance of business owners to lend to new customers led to the birth of the credit information industry. [7] There are certain factors that take information offices into account when assigning a rating to an organization.

First, the Agency takes into account the company`s past when borrowing and repaying debts. Missed payments or credit defaults have a negative impact on the rating. The Agency also examines the future economic potential of the company. If the economic future is bright, the credit rating tends to increase; If the borrower does not have a positive economic outlook, the credit rating decreases. Regulators and legislative bodies in the United States and other jurisdictions rely on credit rating agencies` ratings for a wide range of debt issuers, allowing them to play a regulatory role. [161] [162] This regulatory function is a derivative function in that agencies do not publish ratings for this purpose. [161] Management bodies, both national and international, have incorporated credit ratings into minimum capital requirements for banks, permitted investment alternatives for many institutional investors and similar restrictive rules for insurance undertakings and other financial market participants. [163] [164] Critics argue that this rating, forecasting and monitoring of securities has not worked as well as the agencies suggest. They report near misses, defaults and financial disasters that were not detected by the supervision of credit rating agencies after issuance, or ratings of troubled bonds that were only downgraded shortly before (or even after) bankruptcy. [90] These include the Penn Central bankruptcy in 1970, the budget crisis in New York in 1975, the Orange County default in 1994, the Asian and Russian financial crisis, the collapse of long-term capital hedge funds in 1998, the Enron and WorldCom bankruptcies of 2001 and, in particular, the subprime crisis of 2007-8 [90] [91] [92] [93] [94] Ratings are assigned to investors; Intermediaries used as investment banksList of the best investment banksList of the 100 best investment banks in the world listed in alphabetical order….

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