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