What are ten reasons why credit rating agencies are important in the financial market?

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Credit rating agencies are responsible for assessing the lending risk of businesses and governments for potential lenders. The credit scores issues by these agencies tell lenders the likelihood that a company will repay its debts if issued a loan. Credit rating agencies are important within our financial market. Here are ten reasons why:

  1. Banks utilize credit ratings to determine risk premiums and interest rates on loans that they issue. Higher credit ratings mean that the borrower is more likely to repay the debts owed on the loan, which results in lower interest rates for borrowers with high scores. Lower credit ratings result in higher interest rates. Lenders are reluctant to issue loans to companies and individuals with low credit ratings.
  2. Credit rating agencies provide more accurate credit histories and scores than underwriters because credit rating agencies have access to information that is not publicly available.
  3. Credit rating agencies have an international impact on the economy. Some countries sell securities in the international market. Investors in these securities depend on accurate credit ratings to determine which securities to invest in.
  4. Credit rating agencies shape financial markets through risk measures. This provides clarification to investors on various borrowers.
  5. Credit rating agencies allow borrowers to access several lenders at one time.
  6. Credit ratings set the benchmark for government regulations in the financial sector.
  7. For those who want risky investments, credit rating agencies provide a risk-return ratio.
  8. Credit rating agencies help individuals and companies improve their credit ratings by alerting them of low credit scores and making recommendations to increase their credit scores.
  9. Credit rating agencies assist companies with high credit ratings receive better interest rates.
  10. Credit rating agencies provide security to investors by keeping the risk of bankruptcy at a minimum though safe investments.
Last Updated by eNotes Editorial on

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