Credit rating agencies - where did they actually come from?

There is now much talk of credit rating agencies, particularly in the context of financial crises - the example of Greece - and the complicated political situation in some countries - the recent example of Poland. Generally speaking, most of us associate them with being independent - at least in theory - organisations that assess the financial capacity of both countries and individual institutions. They have become famous in recent years, so most of us associate them mainly with the present time. In reality, however, their history goes much further than that.

The first credit rating agencies appeared around the 19th century, at a time of great capitalism in Western countries and the industrial revolution. In fact, they did what they did today. They thoroughly banalise and analyse the financial situation of individual buyers or whole companies and give an opinion on whether it is safe to do business with an individual and whether he or she will be able to pay his or her obligations arising from the transaction.

The breakthrough in the history of such organizations was 1841, when the Mercantile Agency was established in New York, one of the most famous and reputable agencies. However, similar institutions grew like mushrooms after the rain, which on the one hand favoured the development of some markets, but also caused a lot of difficulties. First of all, the individual agencies used their own criteria and standards for rating. It was therefore necessary to create a uniform evaluation system based on the same principles. These changes had to be introduced all the more so as such ratings were becoming more and more popular on the market and more and more entrepreneurs and ordinary people were guided by them when making any business decisions.

Over time, ratings were extended, initially to single traders and small firms, but later to large corporations. Securities were also assessed. At that time in the United States there was a very rapid development of railways, which in turn brought a completely new energy also to other areas of the market. Investments in railway companies were considered to be one of the most profitable - they were made by a lot of people, although not all of them ended in profits, of course; sometimes there were also company bankruptcies and considerable losses for the investor. Therefore, the demand for professional institutions, which on the basis of the standards and rules adopted in advance are able to make a professional assessment of the company and determine whether investing in it is really safe, has increased even more.

A breakthrough in this area was the introduction of a system consisting in awarding grades symbolised by individual letters. The main concern was to determine whether an economic operator is really credible and whether there is a high or low risk of entering into any kind of business relationship with that operator. In this case, the lowest risk was marked with the letter A, while the letter C meant that entering into any business with a given entity entails a significant risk.

The creator of this system was John Moody, one of the greatest authorities in the financial markets at that time. This man has made an enormous contribution to the overall development of rating systems - and he is the name of one of the most important agencies in the world, which still enjoys great confidence today. Today, there are many rating agencies in the world, but among them there are the so-called Big Three - three of them are considered to be the most important and the most reliable. The first one, named after John Moody, was just announced. The other two are Standard & Poor's and Fitch. All of them were created in about the same time and in quite similar circumstances.

The creation of Standard & Poor`s agency was also closely related to the development of the railways in the United States. Its founder was Henry Varnum Poor, an analyst who closely watched the situation on the railway market. Finally, he set up his own credit rating agency, which assessed the financial health of the individual companies operating on it. John Knowles Fitch is the founder of the third agency that took the name from his name. At the beginning of the 20th century he was involved in various fields, but eventually focused on the financial industry and ratings. He founded the agency in 1914.

There is a lot of controversy around the activities of these three agencies, and there is no shortage of opponents. It is often pointed out that they have enormous power in the financial markets, as even a small rating change can quickly lead to serious turbulence in many sectors. Such a large impact on the market concentrated in the hands of a rather small group of people whose independence has been undermined many times over decades is understandably worrying. Despite numerous attempts, however, no real alternative has yet been created, and the "Big Three" still have a lot to say on the world markets.