Chapter 3: Credit Ratings: Credit Rating Agencies, Rating Process and Surveillance

Abstract

Credit rating agencies originated in the USA in the early 1900s. The construction of the railroad system led to the development of corporate bond issues in order to finance the work. Then ratings began to be applied to the issues. In Europe, the bond markets in the UK and the Netherlands were established earlier on but were much smaller and more focused on sovereign debt so that investors could trust that they would get their investment back. Following the 1907 financial crisis, there was increased demand for independent analysis of bond creditworthiness. In 1909, financial analyst John Moody issued a publication focused solely on railroad bonds. He was the first to introduce subscription fees to investors and his ratings were the first to be widely published. In 1913, his business expanded to include industrial firms and utilities. A few years later the antecedents of the largest rating agencies to date were established. Poor’s Publishing Company began issuing ratings in 1916, Standard Statistics Company in 1922 and the Fitch Publishing Company in 1924.