Methodologies

The Methodologies of the Big Three Credit Rating Agencies

The credit rating agencies of the Big Three Credit Rating Agencies are made publicly available behind a free registration wall. Once downloaded, the methodologies are presented with varying levels of transparency. In order to best understand the credit rating agencies, one has to understand the natural limitations of what can be achieved. Especially with sovereign credit ratings, there is a need for substantial and significant levels of subjectivity owing to the special and unique nature of the sovereign as a borrower. That unique status means that subjective metrics like Rule of Law and Political Stability and Institutional Strength are almost equally as important as the quantitative metrics such as GDP per Capita. When studying the credit rating methodologies, that necessary subjectivity becomes abundantly clear rather quickly. Researchers and commentators have suggested that, in order to account for the subjectivity, a credit rating agency should produce two ratings – one purely quantitative in nature, and the other with qualitative subjectivity injected so that the market can see the difference. Whether this suggestion would be useful is another question.

So, understanding and breaking down the methodologies can only get one so far, but that journey is still worth travelling. In this section of the portal, the individual methodologies are broken down into accessible components, along with additional analysis on the role of the credit rating committee, which every credit rating agency has at the end of their rating process.

It is clear to see from this comparison table that the agencies mostly consider the same metrics, but instead categorise them differently. The effect, owing to the convergence demonstrated within a natural oligopoly, is that the agencies usually arrive at the same point. There will be nuanced differences in the journey that each takes within a given rating, and each rating agency will incorporate external factors like credit rating market share into their thinking (injected at the credit rating committee phase).