TABLE OF CONTENTS Rating agencies represent a valuable source of information on credit risk, since their role is to issue independent credit quality assessments. Rating agencies may produce issuer ratings or issue-specific credit ratings. While the former represent an opinion concerning the obligor s overall capacity to meet its financial obligations, the latter are referred to a specific loan or bond and may reflect the creditworthiness of guarantors and insurers and the quality of any other credit-enhancement agreement specific to the bond or loan (Dinwoodie 2002; de Servigny and Renault 2004). In fact, while ratings are usually requested by issuers (who pay for this service), most agree that the incentive to maintain its reputation for independent judgment is sufficient to prevent a rating agency from becoming too benevolent with rated companies so as to increase its market share. [6.] Agency ratings can therefore represent an extremely important source of information for the bank, even if, unfortunately, only a small portion of the borrowers of a typical commercial bank are rated, since while larger firms financing on the bond market have a clear interest in obtaining a rating, this is not the case for the large majority of smaller borrowers. This unavoidable bias in the composition of the universe of rated firms should also be considered when extracting historical data to support credit risk management analyses from rating agencies data, which still may represent an important resource for many risk managers.
Agency ratings involve assigning issuers to a rating class (see...
