The Future Of National Credit Agencies After Regulation

Following the 2008 financial crisis, much legislation has been proposed to regulate how a national credit agency arrives at rating companies and how that information is made available to the general public. While there is much debate on the specifics of regulation required for corporate credit rating agencies, there is agreement on the general types of regulations that must be imposed.

The Corporate Credit Reporting Agencies

Companies like Moody's Corporation, Standard & Poor's, and Fitch Ratings Inc. all provide credit ratings for companies and many types of securities funds. Many investors rely upon the ratings issued by these agencies to make investment decisions about stocks, mutual funds and other securities. Therefore, when the information at credit rating information provided by these companies is biased or inaccurate, the effects on the general investment market can be devastating. In fact, many people accuse the credit rating agencies as being largely to blame for the severity of the 2008 credit crisis.

The Future of Corporate Credit Rating Systems

Now that the 2008 financial crisis and the subprime credit crisis is largely behind us, many people are demanding changes in the way the corporate credit rating system works. Both public and private investors are demanding more accountability and transparency and are looking for ways to ensure that credit reporting agencies don't simply allow companies to purchase good credit ratings. In fact, some companies are known to go shopping for the best credit ratings and even receive a pre-rating because of existing relationships or contracts with a credit ratings company.

Ratings Should Be Public and Simple

Regulation of the corporate credit rating system will probably include requirements that agencies make credit ratings for companies public and easily accessible to the average investor. Therefore, investors will easily be able to see which companies are rated highest as well as those that are rated not as well. The current rating index of AAA to D will probably still be used in classifying a company or funds specific credit rating; however, higher ratings may be harder to come by because of the increased exposure and risk of public criticism for issuing too many credit ratings of the highest classification.

Diversity and Collateral Needs Will Increase

By making the rating system much less complicated and more transparent, corporate companies with credit ratings below BB+ will need to offer sufficient collateral in order to obtain most types of credit or major loans; furthermore, banks will need to be able to prove the actual value or worth of the collateral and will more than likely be required to show how bad value or worth was determined.

This means that many banks will have to develop systems that store data on collateral and continually reevaluate its value. In short, more transparent credit ratings will require the bank to observe stricter standards for making loans to corporate customers. Should the banks and credit ratings agencies continue the practices of the past, the result may be a total lack of confidence in the credit ratings system altogether.