An Historical Primer on the Business of Credit Rating

Sylla, Richard

doi:10.1007/978-1-4615-0999-8_2

Cited by 137 publications

(63 citation statements)

References 2 publications

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“…It is important to appreciate that CRAs provide views to help investors identify risks, particularly on the most serious default, indicate the quality of long-term debt through the agency's unpublished forecast, and estimates through the characteristics of future cash flows relevant to the type of funding (Belkaoui, 1980). The first CRA in the world was established in the 1909 in US by John Moody for the American railway companies bond rating (Partnoy, 1999;Sylla 2001). John Moody issued the first CR to cover the creditworthiness of bonds Railway Company to help bondholders in their investment decision (Fight, 2000).…”

Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

“…John Moody issued the first CR to cover the creditworthiness of bonds Railway Company to help bondholders in their investment decision (Fight, 2000). CRs used to cover only estimate ratings in the United States because it had the largest bond market than anywhere else in the world, and there were rising levels of income in the US which by 1909 broadened the investor base through the US corporate bond market, essentially US railroad bond market (Sylla 2001). This remained so for 50 years, and during this time the ratings industry was smaller than today, being confined to the railway sector (Sylla, 2001).…”

Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

“…CRs used to cover only estimate ratings in the United States because it had the largest bond market than anywhere else in the world, and there were rising levels of income in the US which by 1909 broadened the investor base through the US corporate bond market, essentially US railroad bond market (Sylla 2001). This remained so for 50 years, and during this time the ratings industry was smaller than today, being confined to the railway sector (Sylla, 2001). Moody's did not rate US state and government bonds until 1919 but earlier in 1910 they extended their coverage to utility and industrial bonds.…”

Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

“…At that time the number of competitors was very small. Moody's and Poor's were publishing standard statistics, and in 1924 Fitch Publishing Company joined the market (Sylla, 2001). …”

Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

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Determinants and Impacts of Internal Credit Rating

Alkhawaldeh¹

2012

International Journal of Financial Research

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This study enrich the research in the area of credit rating by adding supportive power to the explanation of using factors which have an influence on the CR. Such a power can increase the awareness of the current situation of CR as a subject in one of the developing countries that has unique political and economic characteristics. The results in summary confirm that firm characteristic variables have a significant impact on CR. Profitability is positively associated with CR for all models, while leverage and loss propensity are associated negatively with CR for all (or nearly all regarding loss propensity) models. However, capital intensity is not important. Only size and growth potential (Tobin's q) are very strongly positively associated with CR. By contrast, type of sector and audit are not related to CR.

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Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

“…At that time the number of competitors was very small. Moody's and Poor's were publishing standard statistics, and in 1924 Fitch Publishing Company joined the market (Sylla, 2001). …”

Section: A Brief Review Of Cr Literature Backgroundmentioning

confidence: 99%

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Determinants and Impacts of Internal Credit Rating

Alkhawaldeh¹

2012

International Journal of Financial Research

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“…Credit ratings have a long history of playing a role in the regulatory process going back to the 1930s in the U.S. (Sylla, 2002). Asset managers such as pension funds and insurers often have strict asset allocation guidelines which are ratings driven, such as, for instance, a ceiling on the amount that can be invested in speculative grade debt.…”

Section: How Does One Become a Rating Agency? 17mentioning

confidence: 99%

Understanding the Securitization of Subprime Mortgage Credit

2006

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractIn this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. i Executive SummarySection numbers containing more detail are provided in [square] brackets.• Until very recently, the origination of mortgages and issuance of mortgage-backed securities (MBS) was dominated by loans to prime borrowers conforming to underwriting standards set by the Government Sponsored Agencies (GSEs) [2] − By 2006, non-agency origination of $1.480 trillion was more than 45% larger than agency origination, and non-agency issuance of $1.033 trillion was 14% larger than agency issuance of $905 billion.• The securitization process is subject to seven key frictions. The arranger has more information about the quality of the mortgage loans which creates an adverse selection problem: the arranger can securitize bad loans (the lemons) and keep the good ones. This third friction in the securitization of subprime loans affects the relationship that the arranger has with the warehouse lender, the credit rating agency (CRA), and the asset manager. Resolution: haircuts on the collateral imposed by the warehouse lender. Due diligence conducted by the portfolio manager on the arranger and originator. CRAs have access to some private information; they have a franchise value to protect. 4) Frictions between the servicer and the mortgagor: Moral hazard [2. 1.4] In order to maintain the value of the underlying asset (the house), the mortgagor (borrower) has to pay insurance and taxes on and generally maintain the property.In the approach to and during delinquency, the mortgagor has little incentive to do all that. Resolution: Require the mortgagor to regularly escrow funds for both insurance and property taxes. When the borrower fails to advance these funds, the servicer is typically required to make these payments on behalf of the investor. However, limited effort on ...

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The Rating Agencies: Is Regulation the Answer?

Richardson¹,

White²

2009

Restoring Financial Stability

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An Historical Primer on the Business of Credit Rating

Cited by 137 publications

References 2 publications

Determinants and Impacts of Internal Credit Rating

Determinants and Impacts of Internal Credit Rating

Understanding the Securitization of Subprime Mortgage Credit

The Rating Agencies: Is Regulation the Answer?

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