User:Nick Gardner /Sandbox

Where a company issues fixed income securities to be traded on a public market, the issuer may ask a CRA to provide a credit rating for those securities to make them more marketable. In many cases, potential investors may expect an issuer or security to be covered by several CRAs. Investors also may operate under guidelines or legal requirements that prohibit the investor from holding a debt security that is not rated at or above a certain level by one or more CRAs Credit rating agencies provide a third party rating based on access to more information about the borrower than a lender may be able to access, and on accumulated experience in evaluating credit.

ratings serve as a regulatory tool in financial market oversight – one speaks of ‘rating-based regulation’. This is often called the certification function. In this view, rating agencies not only assign a credit evaluation but they also issue a ‘license’ to access the capital markets or to lower regulatory burdens (Partnoy 1999, pp. 683-88). lowers the risk premium required by the investors

there is evidence that all types of rating announcements – outlooks, reviews and rating changes, whether positive or negative – have a significant impact on CDS prices. The Credit Rating Industry: Competition and Regulation Inauguraldissertation zur Erlangung des Doktorgrades der Wirtschafts- und Sozialwissenschaftlichen Fakultät der Universität zu Köln 2007 vorgelegt http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991821

Statement by Lawrence J. White* for the “Roundtable to Examine Oversight of Credit Rating Agencies” U.S. Securities and Exchange Commission Washington, DC April 15, 2009 http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=89e91cf4-71e2-406d-a416-0e391f4f52b0&Witness_ID=f6d7b43b-1747-4756-acc8-435aa501a87c

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=900257 How and Why Credit Rating Agencies are Not Like Other Gatekeepers

Frank Partnoy University of San Diego School of Law

FINANCIAL GATEKEEPERS: CAN THEY PROTECT INVESTORS?, Yasuyuki Fuchita, Robert E. Litan, eds., Brookings Institution Press and the Nomura Institute of Capital Markets Research, 2006 San Diego Legal Studies Paper No. 07-46