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95-730: The Office of the Compliance Advisor/Ombudsman (CAO) is a recourse mechanism for projects supported by the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group . It was established in 1999 and is based in Washington, D.C. Its formation was a concession to the anti-globalization movement to ensure accountability for World Bank-financed projects. The Mission of

190-475: A management capacity. The corporation also offers advice to companies on making decisions, evaluating their impact on the environment and society, and being responsible. It advises governments on building infrastructure and partnerships to further support private sector development. The corporation is assessed by an independent evaluator each year. In 2011, its evaluation report recognized that its investments performed well and reduced poverty, but recommended that

285-592: A profit center for rating agencies. By 2006, Moody's earned $ 881 million in revenue from structured finance. By December 2008, there were over $ 11 trillion structured finance debt securities outstanding in the US bond market. The Big Three issued 97%–98% of all credit ratings in the United States and roughly 95% worldwide, giving them considerable pricing power. This and credit market expansion brought them profit margins of around 50% from 2004 through 2009. As

380-450: A "5-year time horizon", bonds that were given its highest rating (Aaa) had a "cumulative default rate" of just 0.18%, the next highest (Aa2) 0.28%, the next (Baa2) 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied (B2). (See "Default rate" in "Estimated spreads and default rates by rating grade" table to right.) Over a longer time horizon, it stated, "the order is by and large, but not exactly, preserved". Another study in

475-805: A 2.6:1 debt-to-equity ratio and holds 6.6% in reserves against losses on loans to its disbursement portfolio. The IFC's deployable strategic capital decreased from 14% in 2010 to 10% in 2011 as a share of its total resources available, which grew from $ 16.8 billion in 2010 to $ 17.9 billion in 2011. In 2011, the IFC reported total funding commitments (consisting of loans, equity, guarantees, and client risk management) of $ 12.18 billion, slightly lower than its $ 12.66 billion in commitments in 2010. Its core mobilization, which consists of participation and parallel loans, structured finance, its Asset Management Company funds, and other initiatives, grew from $ 5.38 billion in 2010 to $ 6.47 billion in 2011. The IFC's total investment program

570-430: A company or sovereign nation pays its debt on time, the market barely takes momentary notice ... but let a country or corporation unexpectedly miss a payment or threaten default, and bondholders, lawyers and even regulators are quick to rush the field to protest the credit analyst's lapse." Others say that bonds assigned a low credit rating by rating agencies have been shown to default more frequently than bonds that receive

665-408: A credit score by a CRA can create a vicious cycle and a self-fulfilling prophecy : not only do interest rates on securities rise, but other contracts with financial institutions may also be affected adversely, causing an increase in financing costs and an ensuing decrease in creditworthiness. Large loans to companies often contain a clause that makes the loan due in full if the company's credit rating

760-407: A growing free rider problem related to the increasing availability of inexpensive photocopy machines and the increased complexity of the financial markets. The rating agencies added levels of gradation to their rating systems. In 1973, Fitch added plus and minus symbols to its existing letter-rating system. The following year, Standard and Poor's did the same, and Moody's began using numbers for

855-473: A hard number of probability of default to each grade, preferring descriptive definitions, such as "the obligor's capacity to meet its financial commitment on the obligation is extremely strong", (from a Standard and Poor's definition of a AAA-rated bond) or "less vulnerable to non-payment than other speculative issues" (for a BB-rated bond). However, some studies have estimated the average risk and reward of bonds by rating. One study by Moody's claimed that over

950-425: A high credit rating, suggesting that ratings still serve as a useful indicator of credit risk. A number of explanations of the rating agencies' inaccurate ratings and forecasts have been offered, especially in the wake of the subprime crisis: Conversely, the complaint has been made that agencies have too much power over issuers and that downgrades can even force troubled companies into bankruptcy. The lowering of

1045-547: A key role in structured financial transactions such as asset-backed securities (ABS), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs), " synthetic CDOs ", or derivatives . Credit ratings for structured finance instruments may be distinguished from ratings for other debt securities in several important ways. Aside from investors mentioned above—who are subject to ratings-based constraints in buying securities—some investors simply prefer that

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1140-600: A mass-market certification system for fast growing emerging markets called EDGE ("Excellence in Design for Greater Efficiencies"). IFC and the World Green Building Council have partnered to accelerate green building growth in less developed counties. The target is to scale up green buildings over a seven-year period until 20% of the property market is saturated. Certification occurs when the EDGE standard

1235-471: A new institution for the purpose of making private investments in the less developed countries served by the World Bank. The U.S. government encouraged the idea of an international corporation working in tandem with the World Bank to invest in private enterprises without accepting guarantees from governments, without managing those enterprises, and by collaborating with third party investors. When describing

1330-590: A perception of high credit risk , the IFC securitizes assets with predictable cash flows, such as mortgages , credit cards , loans, corporate debt instruments, and revenue streams, in an effort to enhance those companies' credit. Financial derivative products are made available to the IFC's clients strictly for hedging interest rate risk , exchange rate risk , and commodity risk exposure . It serves as an intermediary between emerging market businesses and international derivatives market makers to increase access to risk management instruments. The IFC fulfills

1425-852: A period of eight to fifteen years, before exiting through the sale of shares on a domestic stock exchange , usually as part of an initial public offering . When the IFC invests in a company, it does not assume an active role in management of the company. Through its Global Trade Finance Program, the IFC guarantees trade payment obligations of more than 200 approved banks in over 80 countries to mitigate risk for international transactions. The Global Trade Finance Program provides guarantees to cover payment risks for emerging market banks regarding promissory notes, bills of exchange, letters of credit, bid and performance bonds, supplier credit for capital goods imports, and advance payments. The IFC issued $ 3.46 billion in more than 2,800 guarantees in 2010, of which over 51% targeted IDA member nations. In its fiscal year 2011,

1520-460: A project is deemed to warrant it. Leasing companies and financial intermediaries may also receive loans from the IFC. Though loans have traditionally been denominated in hard currencies , the IFC has endeavored to structure loan products in local currencies. Its disbursement portfolio included loans denominated in 25 local currencies in 2010, and 45 local currencies in 2011, funded largely through swap markets. Local financial markets development

1615-439: A ratings guide in 1857. Credit rating agencies originated in the United States in the early 1900s, when ratings began to be applied to securities, specifically those related to the railroad bond market. In the United States, the construction of extensive railroad systems had led to the development of corporate bond issues to finance them, and therefore a bond market several times larger than in other countries. The bond markets in

1710-554: A result of missing the Enron fraud" and "management stayed the same". During the subprime crisis, when hundreds of billion of dollars' worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to "junk" status within two years of issue, the CRAs' ratings were characterized by critics as "catastrophically misleading" and "provided little or no value". Ratings of preferred stocks also fared poorly. Despite over

1805-399: A single page in length, with scant discussion of methodology. In another case, a chief executive officer of a company had signed off on a report as though a board member. Also, overseas staff of ratings agencies had assigned credit ratings despite lacking the necessary accreditation. Defenders of credit rating agencies complain of the market's lack of appreciation. Argues Robert Clow, "When

1900-645: A stake in FEMSA, a former manufacturer of auto parts in Spain that is now part of Bosch Spain . The IFC invests in businesses' equity either directly or via private-equity funds , generally from five up to twenty percent of a company's total equity. IFC's private-equity portfolio currently stands at roughly $ 3.0 billion committed to about 180 funds. The portfolio is widely distributed across all regions including Africa, East Asia, South Asia, Eastern Europe, Latin America and

1995-465: A structured finance product be rated by a credit rating agency. And not all structured finance products receive a credit rating agency rating. Ratings for complicated or risky CDOs are unusual and some issuers create structured products relying solely on internal analytics to assess credit risk. The Financial Crisis Inquiry Commission has described the Big Three rating agencies as "key players in

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2090-455: A treasury role by borrowing international capital to fund lending activities. It is usually one of the first institutions to issue bonds or to do swaps in emerging markets denominated in those markets' local currencies. The IFC's new international borrowings amounted to $ 8.8 billion in 2010 and $ 9.8 billion in 2011. The IFC Treasury actively engages in liquidity management in an effort to maximize returns and assure that funding for its investments

2185-583: A wholly owned subsidiary to manage all capital funds to be invested in emerging markets. The AMC manages capital mobilized by the IFC as well as by third parties such as sovereign or pension funds, and other development financing organizations. Despite being owned by the IFC, the AMC has investment decision autonomy and is charged with a fiduciary responsibility to the four individual funds under its management. It also aims to mobilize additional capital for IFC investments as it can make certain types of investments which

2280-496: A year of rising mortgage delinquencies, Moody's continued to rate Freddie Mac 's preferred stock triple-A until mid-2008, when it was downgraded to one tick above the junk bond level. Some empirical studies have also found that rather than a downgrade lowering the market price and raising the interest rates of corporate bonds, the cause and effect are reversed. Expanding yield spreads (i.e., declining value and quality) of corporate bonds precedes downgrades by agencies, suggesting it

2375-742: Is IFC granting financing to a Saudi prince for a five-star hotel in Ghana. The World Bank and International Monetary Fund were designed by delegates at the Bretton Woods conference in 1944. The World Bank, then consisting of only the International Bank for Reconstruction and Development , became operational in 1946. Robert L. Garner joined the World Bank in 1947 as a senior executive and expressed his view that private business could play an important role in international development. In 1950, Garner and his colleagues proposed establishing

2470-593: Is a corporation whose shareholders are member governments that provide paid-in capital and have the right to vote on its matters. Originally, it was more financially integrated with the World Bank Group, but later, the IFC was established separately and eventually became authorized to operate as a financially autonomous entity and make independent investment decisions. It offers an array of debt and equity financing services and helps companies face their risk exposures while refraining from participating in

2565-722: Is a member of the World Bank Group and is headquartered in Washington, D.C. in the United States. It was established in 1956, as the private-sector arm of the World Bank Group, to advance economic development by investing in for-profit and commercial projects for poverty reduction and promoting development. The IFC's stated aim is to create opportunities for people to escape poverty and achieve better living standards by mobilizing financial resources for private enterprise, promoting accessible and competitive markets, supporting businesses and other private-sector entities, and creating jobs and delivering necessary services to those who are poverty stricken or otherwise vulnerable. Since 2009,

2660-460: Is ascribed to higher earnings from the IFC's investments and also from higher service fees. The IFC reported a partial offset from lower liquid asset trading income, higher administrative costs, and higher advisory service expenses. The IFC made $ 600 million in grants to IDA countries in fiscal 2011, up from $ 200 million in fiscal 2010 and $ 450 million in fiscal 2009. The IFC reported a net income of $ 1.58 billion in fiscal year 2011. In previous years,

2755-495: Is governed by its Board of Governors which meets annually and consists of one governor per member country (most often the country's finance minister or treasury secretary). Each member typically appoints one governor and also one alternate. Although corporate authority rests with the Board of Governors, the governors delegate most of their corporate powers and their authority over daily matters such as lending and business operations to

2850-426: Is lowered beyond a certain point (usually from investment grade to "speculative"). The purpose of these "ratings triggers" is to ensure that the loan-making bank is able to lay claim to a weak company's assets before the company declares bankruptcy and a receiver is appointed to divide up the claims against the company. The effect of such ratings triggers, however, can be devastating: under a worst-case scenario, once

2945-652: Is met, which requires 20% less energy, water, and materials than conventional homes. [REDACTED]   World Bank Group Credit rating agency Other forms of a rating agency include environmental, social and corporate governance (ESG) rating agencies and the Chinese Social Credit System . The debt instruments rated by CRAs include government bonds , corporate bonds , CDs , municipal bonds , preferred stock , and collateralized securities, such as mortgage-backed securities and collateralized debt obligations . The issuers of

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3040-419: Is one of IFC's strategic focus areas. In line with its AAA rating, it has strict concentration, liquidity, asset-liability and other policies. The IFC committed to approximately $ 5.7 billion in new loans in 2010, and $ 5 billion in 2011. Although the IFC's shareholders initially only allowed it to make loans, the IFC was authorized in 1961 to make equity investments, the first of which was made in 1962 by taking

3135-612: Is part of its approach to risk management. IFC's Environmental and social policies, guidelines, and tools are widely adopted as market standards and embedded in operational policies by corporations, investors, financial intermediaries, stock exchanges, regulators, and countries. In particular, the EHS Guidelines contain the performance levels and measures that are normally acceptable to the World Bank Group, and that are generally considered to be achievable in new facilities at reasonable costs by existing technology. The IFC has created

3230-416: Is readily available while managing risks to the IFC. In addition to its investment activities the IFC provides a range of advisory services to support corporate decision-making regarding business, environment, social impact, and sustainability. The IFC's corporate advice targets governance, managerial capacity, scalability, and corporate responsibility. It prioritizes the encouragement of reforms that improve

3325-693: Is the market that alerts the CRAs of trouble and not vice versa. In February 2018, an investigation by the Australian Securities and Investments Commission found a serious lack of detail and rigour in many of the ratings issued by agencies. ASIC examined six agencies, including the Australian arms of Fitch, Moody's and S&P Global Ratings (the other agencies were Best Asia-Pacific, Australia Ratings and Equifax Australia). It said agencies had often paid lip service to compliance. In one case, an agency had issued an annual compliance report only

3420-409: The 1907 financial crisis , demand rose for such independent market information, in particular for independent analyses of bond creditworthiness. In 1909, financial analyst John Moody issued a publication focused solely on railroad bonds. His ratings became the first to be published widely in an accessible format, and his company was the first to charge subscription fees to investors. In 1913,

3515-487: The Journal of Finance calculated the additional interest rate or "spread" that corporate bonds pay over that of "riskless" US Treasury bonds, according to the bonds rating. (See "Basis point spread" in the table to right.) Looking at rated bonds from 1973 through 1989, the authors found a AAA-rated bond paid only 43 " basis points " (or 43/100ths of a percentage point) more than a Treasury bond (so that it would yield 3.43% if

3610-399: The 2007–8 subprime mortgage crisis . In the 2001 Enron accounting scandal , the company's ratings remained at investment grade until four days before bankruptcy—though Enron's stock had been in sharp decline for several months —when "the outlines of its fraudulent practices" were first revealed. Critics complained that "not a single analyst at either Moody's or S&P lost his job as

3705-712: The CAO is to address complains of people affected by IFC and MIGA projects, and to improve the accountability of both institutions In 2014, the CAO reported that IFC funding was tied to the murder of Indigenous peoples in Honduras . Later in 2014, Osvaldo Gratacós became ombudsman. In September 2020, the CAO intensified its sexual assault investigation of the IFC-funded Bridge International Academies 's schools in Kenya. In October 2020, Gratacós

3800-579: The Fitch Publishing Company in 1924. In the United States, the rating industry grew and consolidated rapidly following the passage of the Glass-Steagall act of 1933 and the separation of the securities business from banking. As the market grew beyond that of traditional investment banking institutions, new investors again called for increased transparency, leading to the passage of new, mandatory disclosure laws for issuers, and

3895-886: The IFC ALAC Fund) was created in 2010 and is worth $ 1 billion. As of March 2012 , the ALAC Fund has invested a total of $ 349.1 million into twelve businesses. The Africa Capitalization Fund was set up in 2011 to invest in commercial banks in both Northern and Sub-Saharan Africa and its commitments totaled $ 181.8 million in March 2012. As of 2018 , Marcos Brujis serves as CEO of the AMC. The IFC prepares consolidated financial statements in accordance with United States GAAP which are audited by KPMG . It reported income before grants to IDA members of $ 2.18 billion in fiscal year 2011, up from $ 1.95 billion in fiscal 2010 and $ 299 million in fiscal 2009. The increase in income before grants

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3990-561: The IFC as having a strong financial standing with adequate capital and liquidity, cautious management policies, a high level of geographic diversification, and anticipated treatment as a preferred creditor given its membership in the World Bank Group. It noted that the IFC faces a weakness relative to other multilateral institutions of having higher risks due to its mandated emphasis on private sector investing and its income heavily affected by equity markets. IFC Sustainability Framework articulates IFC's commitment to sustainable development and

4085-807: The IFC cannot. As of 2011 , the AMC managed the IFC Capitalization Fund (Equity) Fund, L.P., the IFC Capitalization (Subordinated Debt) Fund, L.P., the IFC African, Latin American, and Caribbean Fund, L.P., and the Africa Capitalization Fund, Ltd. The IFC Capitalization (Equity) Fund holds $ 1.3 billion in equity, while the IFC Capitalization (Subordinated Debt) Fund is valued at $ 1.7 billion. The IFC African, Latin American, and Caribbean Fund (referred to as

4180-622: The IFC coordinates its activities in many areas with the other World Bank Group institutions, it generally operates independently as it is a separate entity with legal and financial autonomy, established by its own Articles of Agreement. The corporation operates with a staff of over 3,400 employees, of which half are stationed in field offices across its member nations. The IFC's investment services consist of loans , equity, trade finance , syndicated loans , structured and securitized finance, client risk management services, treasury services , and liquidity management. In its fiscal year 2010,

4275-779: The IFC had reported a net loss of $ 151 million in fiscal 2009 and $ 1.75 billion in fiscal 2010. The IFC's total capital amounted to $ 20.3 billion in 2011, of which $ 2.4 billion was paid-in capital from member countries, $ 16.4 billion was retained earnings, and $ 1.5 billion was accumulated other comprehensive income . The IFC held $ 68.49 billion in total assets in 2011. The IFC's return on average assets (GAAP basis) decreased from 3.1% in 2010 to 2.4% in 2011. Its return on average capital (GAAP basis) decreased from 10.1% in 2010 to 8.2% in 2011. The IFC's cash and liquid investments accounted for 83% of its estimated net cash requirements for fiscal years 2012 through 2014. Its external funding liquidity level grew from 190% in 2010 to 266% in 2011. It has

4370-513: The IFC has focused on a set of development goals that its projects are expected to target. Its goals are to increase sustainable agriculture opportunities, improve healthcare and education , increase access to financing for microfinance and business clients, advance infrastructure , help small businesses grow revenues, and invest in climate health. The IFC is owned and governed by its member countries but has its own executive leadership and staff that conduct its normal business operations. It

4465-529: The IFC in 1955, World Bank President Eugene R. Black said that the IFC would only invest in private firms, rather than make loans to governments, and it would not manage the projects in which it invests. The concept was nonetheless controversial in the US, where some business interests were uncomfortable with the public ownership of private firms. Nonetheless, in 1956, the International Finance Corporation became operational under

4560-581: The IFC invested $ 12.7 billion in 528 projects across 103 countries. Of that total investment commitment, approximately 39% ($ 4.9 billion) was invested into 255 projects across 58 member nations of the World Bank's International Development Association (IDA). The IFC makes loans to businesses and private projects generally with maturities of seven to twelve years. It determines a suitable repayment schedule and grace period for each loan individually to meet borrowers' currency and cash flow requirements. The IFC may provide longer-term loans or extend grace periods if

4655-566: The IFC issued $ 4.6 billion in more than 3,100 guarantees. In 2009, the IFC launched a separate program for crisis response, known as its Global Trade Liquidity Program, which provides liquidity for international trade among less developed countries. Since its establishment in 2009, the Global Trade Liquidity Program assisted with over $ 15 billion in trade in 2011. The IFC operates a Syndicated Loan Program in an effort to mobilize capital for development goals. The program

4750-555: The Middle East, and recently has invested in Small Enterprise Assistance Funds ' (SEAF) Caucasus Growth Fund, Aureos Capital's Kula Fund II ( Papua New Guinea , Fiji , Pacific Islands ) and Leopard Capital 's Haiti Fund. Other equity investments made by the IFC include preferred equity , convertible loans , and participation loans . The IFC prefers to invest for the long-term, usually for

4845-485: The Netherlands and Britain had been established longer but tended to be small, and revolved around sovereign governments that were trusted to honor their debts. Companies were founded to provide investors with financial information on the growing railroad industry, including Henry Varnum Poor 's publishing company, which produced a publication compiling financial data about the railroad and canal industries. Following

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4940-496: The SEC and decisions by courts. To determine a bond's rating , a credit rating agency analyzes the accounts of the issuer and the legal agreements attached to the bond to produce what is effectively a forecast of the bond's chance of default , expected loss, or a similar metric. The metrics vary somewhat between the agencies. S&P's ratings reflect default probability, while ratings by Moody's reflect expected investor losses in

5035-486: The Treasury bond yielded 3.00%). A CCC-rated "junk" (or speculative) bond, on the other hand, paid over 4% more than a Treasury bond on average (7.04% if the Treasury bond yielded 3.00%) over that period. The market also follows the benefits from ratings that result from government regulations (see below ), which often prohibit financial institutions from purchasing securities rated below a certain level. For example, in

5130-595: The US subprime mortgage crisis and subsequent financial crisis of 2007–2008 . During that debacle, 73%—over $ 800 billion worth —of all mortgage-backed securities that one credit rating agency (Moody's) had rated triple-A in 2006 were downgraded to junk status two years later. In July 2008, SIFMA formed a global task force with members drawn from a cross-section of the financial services industry, including asset managers, underwriters, and issuers, and provided industry input to lawmakers and regulators in Europe and Asia, and

5225-484: The United States disclose their existence. The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act mandated improvements to the regulation of credit rating agencies and addressed several issues relating to the accuracy of credit ratings specifically. Under Dodd-Frank rules, agencies must publicly disclose how their ratings have performed over time and must provide additional information in their analyses so investors can make better decisions. An amendment to

5320-561: The United States, in accordance with two 1989 regulations, pension funds are prohibited from investing in asset-backed securities rated below A, and savings and loan associations from investing in securities rated below BBB. CRAs provide "surveillance" (ongoing review of securities after their initial rating) and may change a security's rating if they feel its creditworthiness has changed. CRAs typically signal in advance their intention to consider rating changes. Fitch, Moody's, and S&P all use negative "outlook" notifications to indicate

5415-492: The act also specifies that ratings are not protected by the First Amendment as free speech but are "fundamentally commercial in character and should be subject to the same standards of liability and oversight as apply to auditors, securities analysts and investment bankers." Implementation of this amendment has proven difficult due to conflict between the SEC and the rating agencies. The Economist magazine credits

5510-527: The agencies' highest ratings were downgraded to junk during the financial crisis of 2007–08 . Rating downgrades during the European sovereign debt crisis of 2010–12 were blamed by EU officials for accelerating the crisis. Credit rating is a highly concentrated industry, with the "Big Three" credit rating agencies controlling approximately 95% of the ratings business. Moody's Investors Service and Standard & Poor's (S&P) together control 80% of

5605-460: The agencies' informed opinions, protected as "free speech" under the First Amendment . As one rating agency disclaimer read: The ratings ... are and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. Under an amendment to the 2010 Dodd-Frank Act , this protection has been removed, but how the law will be implemented remains to be determined by rules made by

5700-458: The board of directors. The IFC's Board of Directors consists of 25 executive directors who meet regularly and work at the IFC's headquarters, and is chaired by the President of the World Bank Group . The executive directors collectively represent all 186 member countries. When the IFC's Board of Directors votes on matters brought before it, each executive director's vote is weighted according to

5795-748: The case of default. For corporate obligations, Fitch's ratings incorporate a measure of investor loss in the event of default, but its ratings on structured, project, and public finance obligations narrowly measure default risk. The process and criteria for rating a convertible bond are similar, although different enough that bonds and convertible bonds issued by the same entity may still receive different ratings. Some bank loans may receive ratings to assist in wider syndication and attract institutional investors. The relative risks—the rating grades—are usually expressed through some variation of an alphabetical combination of lower- and uppercase letters, with either plus or minus signs or numbers added to further fine-tune

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5890-490: The company's debt is downgraded by a CRA, the company's loans become due in full; if the company is incapable of paying all of these loans in full at once, it is forced into bankruptcy (a so-called death spiral ). These ratings triggers were instrumental in the collapse of Enron . Since that time, major agencies have put extra effort into detecting them and discouraging their use, and the US SEC requires that public companies in

5985-401: The corporation define poverty and expected outcomes more explicitly to better-understand its effectiveness and approach poverty reduction more strategically. The corporation's total investments in 2011 amounted to $ 18.66 billion. It committed $ 820 million to advisory services for 642 projects in 2011, and held $ 24.5 billion worth of liquid assets. The IFC is in good financial standing and received

6080-600: The creation of the Securities and Exchange Commission (SEC). In 1936, regulation was introduced to prohibit banks from investing in bonds determined by "recognized rating manuals" (the forerunners of credit rating agencies) to be "speculative investment securities" ("junk bonds", in modern terminology). US banks were permitted to hold only "investment grade" bonds, and it was the ratings of Fitch, Moody's, Poor's, and Standard that legally determined which bonds were which. State insurance regulators approved similar requirements in

6175-590: The credit reporting industry. Mercantile credit agencies—the precursors of today's rating agencies—were established in the wake of the financial crisis of 1837 . These agencies rated the ability of merchants to pay their debts and consolidated these ratings in published guides. The first such agency was established in 1841 by Lewis Tappan in New York City. It was subsequently acquired by Robert Dun, who published its first ratings guide in 1859. Another early agency, John Bradstreet, formed in 1849 and published

6270-399: The fact that merchants knew their customers personally and knew whether or not they would be able to pay them back. As trading distances increased, merchants no longer personally knew their customers and became wary of extending credit to people who they did not know in fear of them not being able to pay them back. Business owners' hesitation to extend credit to new customers led to the birth of

6365-700: The following decades. From 1930 to 1980, the bonds and ratings of them were primarily relegated to American municipalities and American blue chip industrial firms. International "sovereign bond" rating shrivelled during the Great Depression to a handful of the most creditworthy countries, after a number of defaults of bonds issued by governments such as Germany's. In the late 1960s and 1970s, ratings were extended to commercial paper and bank deposits . Also during that time, major agencies changed their business model by beginning to charge bond issuers as well as investors. The reasons for this change included

6460-580: The free speech defence at least in part for the fact that "41 legal actions targeting S&P have been dropped or dismissed" since the crisis. In the European Union , there is no specific legislation governing contracts between issuers and credit rating agencies. General rules of contract law apply in full, although it is difficult to hold agencies liable for breach of contract. In 2012, an Australian federal court held Standard & Poor's liable for inaccurate ratings. Credit rating agencies play

6555-438: The global market, and Fitch Ratings controls a further 15%. They are externalized sell-side functions for the marketing of securities. When the United States began to expand to the west and other parts of the country, so did the distance of businesses to their customers. When businesses were close to those who purchased goods or services from them, it was easy for the merchants to extend credit to them, due to their proximity and

6650-753: The highest ratings from two independent credit rating agencies in 2018. IFC comes under frequent criticism from NGOs that it is not able to track its money because of its use of financial intermediaries. For example, a report by Oxfam International and other NGOs in 2015, "The Suffering of Others," found the IFC was not performing enough due diligence and managing risk in many of its investments in third-party lenders. Other criticism focuses on IFC working excessively with large companies or wealthy individuals already able to finance their investments without help from public institutions such as IFC, and such investments do not have an adequate positive development impact. An example often cited by NGOs and critical journalists

6745-496: The influence and profitability of CRAs expanded, so did scrutiny and concern about their performance and alleged illegal practices. In 1996 the US Department of Justice launched an investigation into possible improper pressuring of issuers by Moody's in order to win business. Agencies were subjected to dozens of lawsuits by investors complaining of inaccurate ratings following the collapse of Enron , and especially after

6840-437: The international financial institutions and other participants. To service clients without ready access to low-cost financing, the IFC relies on structured or securitized financial products such as partial credit guarantees, portfolio risk transfers, and Islamic finance . The IFC committed $ 797 million in the form of structured and securitized financing in 2010. For companies that face difficulty in obtaining financing due to

6935-716: The leadership of Garner. It initially had 12 staff members and $ 100 million (equivalent to $ 1121 million in 2023) in capital. The corporation made its inaugural investment in 1957 by making a $ 2 million (equivalent to $ 22 million in 2023) loan to a Brazil-based affiliate of Siemens & Halske (now Siemens AG ). In 2007, IFC bought 18% stake in the Indian Financial firm, Angel Broking . In December 2015, IFC supported Greek banks with 150 million euros by buying shares in four of them: Alpha Bank (60 million), Eurobank (50 million), Piraeus Bank (20 million) and National Bank of Greece (20 million). The IFC

7030-457: The long-held triple-A rating of US securities. Since the spring of 2010, one or more of the Big Three relegated Greece, Portugal, and Ireland to " junk " status—a move that many EU officials say has accelerated a burgeoning European sovereign-debt crisis . In January 2012, amid continued eurozone instability, S&P downgraded nine eurozone countries, stripping France and Austria of their triple-A ratings . Credit rating agencies assess

7125-677: The obligations or securities may be companies, special purpose entities , state or local governments, non-profit organizations , or sovereign nations. A credit rating facilitates the trading of securities on international markets. It affects the interest rate that a security pays out, with higher ratings leading to lower interest rates. Individual consumers are rated for creditworthiness not by credit rating agencies but by credit bureaus (also called consumer reporting agencies or credit reference agencies), which issue credit scores . The value of credit ratings for securities has been widely questioned. Hundreds of billions of securities that were given

7220-435: The paying customers of CRAs have primarily not been buyers of securities but their issuers, raising the issue of conflict of interest (see below). In addition, rating agencies have been liable—at least in US courts—for any losses incurred by the inaccuracy of their ratings only if it is proven that they knew the ratings were false or exhibited "reckless disregard for the truth". Otherwise, ratings are simply an expression of

7315-424: The potential for a downgrade within the next two years (one year in the case of speculative-grade credits). Negative "watch" notifications are used to indicate that a downgrade is likely within the next 90 days. Critics maintain that this rating, outlooking, and watching of securities has not worked nearly as smoothly as agencies suggest. They point to near-defaults, defaults, and financial disasters not detected by

7410-462: The price volatility of mutual funds and mortgage-backed securities. Ratings were increasingly used in most developed countries' financial markets and in the " emerging markets " of the developing world . Moody's and S&P opened offices Europe, Japan, and particularly emerging markets. Non-American agencies also developed outside of the United States. Along with the largest US raters, one British, two Canadian and three Japanese firms were listed among

7505-468: The process" of mortgage securitization , providing reassurance of the soundness of the securities to money manager investors with "no history in the mortgage business". Credit rating agencies began issuing ratings for mortgage-backed securities (MBS) in the mid-1970s. In subsequent years, the ratings were applied to securities backed by other types of assets. During the first years of the twenty-first century, demand for highly rated fixed income securities

7600-581: The rating agencies' post-issuance surveillance, or ratings of troubled debt securities not downgraded until just before (or even after) bankruptcy. These include the 1970 Penn Central bankruptcy , the 1975 New York City fiscal crisis , the 1994 Orange County default , the Asian and Russian financial crises, the 1998 collapse of the Long-Term Capital Management hedge fund, the 2001 Enron and WorldCom bankruptcies, and especially

7695-445: The rating agencies; they allowed pension funds and money market funds to purchase only securities rated above certain levels. A market for low-rated, high-yield "junk" bonds blossomed in the late 1970s, expanding securities financing to firms other than a few large, established blue chip corporations. Rating agencies also began to apply their ratings beyond bonds to counterparty risks, the performance risk of mortgage servicers, and

7790-402: The rating would be done by "nationally recognized statistical ratings organizations" (NRSROs). This referred to the "Big Three", but in time ten agencies (later six, due to consolidation) were identified by the SEC as NRSROs. Rating agencies also grew in size and profitability as the number of issuers accessing the debt markets grew exponentially, both in the United States and abroad. By 2009

7885-496: The rating. Fitch and S&P use (from the most creditworthy to the least) AAA, AA, A, and BBB for investment-grade long-term credit risk and BB, CCC, CC, C, and D for "speculative" long-term credit risk. Moody's long-term designators are Aaa, Aa, A, and Baa for investment grade and Ba, B, Caa, Ca, and C for speculative grade. Fitch and S&P use pluses and minuses (e.g., AA+ and AA−), and Moody's uses numbers (e.g., Aa1 and Aa3) to add further gradations. Agencies do not attach

7980-542: The ratings publication by Moody's underwent two significant changes: it expanded its focus to include industrial firms and utilities, and it began to use a letter-rating system. For the first time, public securities were rated using a system borrowed from the mercantile credit rating agencies, using letters to indicate their creditworthiness. In the next few years, antecedents of the " Big Three " credit rating agencies were established. Poor's Publishing Company began issuing ratings in 1916, Standard Statistics Company in 1922, and

8075-412: The relative credit risk of specific debt securities or structured finance instruments and borrowing entities ( issuers of debt), and in some cases the creditworthiness of governments and their securities . By serving as information intermediaries , CRAs theoretically reduce information costs, increase the pool of potential borrowers, and promote liquid markets . These functions may increase

8170-400: The same purpose in 1982. The end of the Bretton Woods system in 1971 led to the liberalization of financial regulations and the global expansion of capital markets in the 1970s and 1980s. In 1975, SEC rules began explicitly referencing credit ratings. For example, the commission changed its minimum capital requirements for broker-dealers , allowing smaller reserves for higher-rated bonds;

8265-521: The supply of available risk capital in the market and promote economic growth. Credit rating agencies provide assessments about the creditworthiness of bonds issued by corporations , governments , and packagers of asset-backed securities . In market practice, a significant bond issuance generally has a rating from one or two of the Big Three agencies. CRAs theoretically provide investors with an independent evaluation and assessment of debt securities ' creditworthiness. However, in recent decades

8360-544: The total share capital of the member countries represented by that director. IFC is currently led by Makhtar Diop who was appointed as the institution's Managing Director and Executive Vice President in February 2021. Prior to this appointment, he was the World Bank's Vice President for Infrastructure, where he led the Bank's global efforts to build sustainable infrastructure in developing and emerging economies. Although

8455-656: The trade friendliness and ease of doing business in an effort to advise countries on fostering a suitable investment climate. It also offers advice to governments on infrastructure development and public-private partnerships. The IFC attempts to guide businesses toward more sustainable practices particularly with regards to having good governance, supporting women in business, and proactively combating climate change . The International Finance Corporation has stated that cities in emerging markets can attract more than $ 29 trillion in climate-related sectors by 2030. The IFC established IFC Asset Management Company LLC (IFC AMC) in 2009 as

8550-530: The world's "most influential" rating agencies in the early 1990s by the Financial Times publication Credit Ratings International . Structured finance was another growth area of growth. The "financial engineering" of the new "private-label" asset-backed securities —such as subprime mortgage-backed securities (MBS), collateralized debt obligations (CDO), " CDO-Squared ", and " synthetic CDOs "—made them "harder to understand and to price" and became

8645-415: The worldwide bond market (total debt outstanding) reached an estimated $ 82.2 trillion, in 2009 dollars. Two economic trends of the 1980s and 90s that brought significant expansion for the global capital market were More debt securities meant more business for the Big Three agencies, which many investors depended on to judge the securities of the capital market. US government regulators also depended on

8740-434: Was created in 1957 and as of 2011 has channeled approximately $ 38 billion from over 550 financial institutions toward development projects in over 100 different emerging markets . The IFC syndicated a total of $ 4.7 billion in loans in 2011, twice that of its $ 2 billion worth of syndications in 2010. Due to banks retrenching from lending across borders in emerging markets, in 2009 the IFC started to syndicate parallel loans to

8835-616: Was designated by the U.S. President's Working Group on Financial Markets as the private-sector group to provide the PWG with industry recommendations on credit rating matters. It published the "Recommendations of the Securities Industry and Financial Markets Association Credit Rating Agency Task Force", which included a dozen recommendations to change the credit rating agency process. Downgrades of European and US sovereign debt were also criticized. In August 2011, S&P downgraded

8930-431: Was replaced by Janine Ferretti. This article about an international organization is a stub . You can help Misplaced Pages by expanding it . International Finance Corporation The International Finance Corporation ( IFC ) is an international financial institution that offers investment , advisory, and asset-management services to encourage private-sector development in less developed countries . The IFC

9025-558: Was reported at a value of $ 18.66 billion for fiscal year 2011. Its advisory services portfolio included 642 projects valued at $ 820 million in 2011, compared to 736 projects at $ 859 million in 2010. The IFC held $ 24.5 billion in liquid assets in 2011, up from $ 21 billion in 2010. The IFC received credit ratings of AAA from Standard & Poor's in December 2012 and AAA from Moody's Investors Service in November 2012. S&P rated

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