Financial institutions ratings refers to the credit rating processes and analysis of financial institutions performed by various credit rating agencies. According to the credit rating of the financial institutions, the strength of a particular financial institution can be judged. At present, there are more than 100 credit rating agencies all over the world.
There are a large number of credit rating agencies all over the world that carry out credit rating functions for financial institutions. A credit rating agency is basially an organization, which allots credit ratings for financial institutions or issuers of various types of debt obligations like bonds and debentures. The financial institutions for which the credit rating is done usually include the following:
Companies
Non profit organizations
Investment banks
Federal government agencies
State government agencies
These entities issue debt securities that are traded on the secondary market. They do it for various funding purposes. With the help of a credit rating, the creditworthiness of a financial institution can be measured. It also analyzes the ability of a financial institution regarding the repayment of loans that it has taken, and also the amount of interest that is accrued. The credit rating of a financial institution also influences the interest rates applicable to the bonds and debentures issued by those institutions. If the credit rating of a financial services provider or bond issuer is high, then the amount of interest paid to the investors is low because they consider the investment to be less risky. On the other hand, if the credit rating of a financial services provider or bond issuer is low, then the amount of interest paid to the investors is high because the investors consider the investment to be more risky and the issuer tries to compensate the degree of risk by paying high rate of interest.
The credit ratings of financial institutions are useful for the following entities:
- Bond issuers
- Investment banks
- Broker-dealers
- Government regulatory agencies
- Structured financial institutions
The leading credit rating agencies which carry out credit ratings on financial institutions include the following:
- A.M. Best (United States)
- Moody's (United States)
- Fitch Ratings (United States)
- Standard & Poor's Ratings (United States)
- Dominion Bond Rating Service (DBRS-Canada)
- Baycorp Advantage (Australia)
- Pacific Credit Rating (Peru)