How the Big Three Credit Rating Agencies Affect Your Finances (And What You Can Do About It)

The “Big Three” Credit Rating Agencies in One Minute: Standard & Poor’s/S&P, Moody’s and Fitch Group

If you are an investor, a borrower, or a financial enthusiast, you have probably heard of the “Big Three” credit rating agencies. These are the companies that assess the creditworthiness and financial stability of various entities, such as governments, corporations, and financial institutions. They assign ratings to the debts issued by these entities, indicating the likelihood of default or repayment. The ratings can influence the interest rates, borrowing costs, and investment decisions of millions of people around the world.

But who are these “Big Three” credit rating agencies, and how did they become so influential?

The “Big Three” are S&P Global Ratings (S&P), Moody’s Investors Service (Moody’s), and Fitch Ratings (Fitch). They are all based in the United States, except for Fitch, which is dual-headquartered in New York and London. Together, they control about 95% of the global rating market, with S&P and Moody’s each having about 40%, and Fitch having about 15%¹

The history of the “Big Three” dates back to the early 20th century, when the first rating agencies emerged to provide information and analysis to investors and lenders. S&P was founded in 1860 by Henry Varnum Poor, a financial journalist who published books on the history and operations of American railroads. In 1906, it merged with the Standard Statistics Bureau, a provider of financial statistics. Moody’s was founded in 1909 by John Moody, a former Wall Street analyst who published ratings on railroad bonds. Fitch was founded in 1913 by John Knowles Fitch, a former editor of the Financial Review, who introduced the AAA-to-D rating scale²

The “Big Three” gained prominence and recognition in the following decades, as they expanded their coverage to other sectors and regions, and as they became regulated by the U.S. government. In 1975, the U.S. Securities and Exchange Commission (SEC) designated them as the Nationally Recognized Statistical Rating Organizations (NRSROs), meaning that they were used by the U.S. government for various regulatory purposes, such as setting capital requirements for banks and insurance companies. This gave them a competitive advantage and a quasi-official status in the financial markets³

The “Big Three” also faced criticism and controversy, especially after the 2007-2008 global financial crisis, when they were accused of giving inflated and inaccurate ratings to risky and complex securities, such as mortgage-backed securities, that contributed to the collapse of the U.S. housing market and the subsequent recession. The Financial Crisis Inquiry Commission, a U.S. government-appointed panel, called them “key enablers of the financial meltdown” and “essential cogs in the wheel of financial destruction”⁴ The “Big Three” were also criticized for having conflicts of interest, as they were paid by the issuers of the securities they rated, and for having a lack of transparency, accountability, and competition.

The “Big Three” have since implemented reforms and improvements to address some of the issues raised by the crisis, such as enhancing their methodologies, governance, and disclosure practices. They have also faced more regulation and oversight from the U.S. and other countries, as well as more competition from new and emerging rating agencies, such as Morningstar, DBRS, and China’s Dagong. However, the “Big Three” still remain dominant and influential in the global rating industry, as they are widely used and trusted by investors, issuers, and regulators.

The “Big Three” credit rating agencies are not perfect, but they are essential players in the financial markets. They provide valuable information and opinions that help assess the credit risk and financial health of various entities. They also have a significant impact on the cost and availability of capital, and on the stability and growth of the global economy. As such, they deserve our attention and scrutiny, as well as our respect and appreciation.