Credit agency

To Terms Described

Credit agency

Definition and comparison to credit registries

A credit agency is among the two primary kinds of credit rating institutions. It collects information from a multitude of financial and nonfinancial entities, including microfinance institutions and charge card companies, and offers comprehensive credit information with value-added services for example credit ratings to personal lenders.

Credit agencies are independently owned and independently operated companies. In comparison, credit registries—the other primary kind of credit rating institution—tend to become public entities, managed by bank supervisors or central banks.

As independently owned commercial enterprises, credit agencies have a tendency to focus on the data needs of business lenders. Though there’s variation within the type and extent of knowledge they collect, credit agencies generally make an effort to collect very detailed data on individual clients. They therefore have a tendency to cover smaller sized loans than credit registries and frequently collect information from a multitude of financial and nonfinancial entities, including retailers, charge card companies, and microfinance institutions. Consequently, data collected by credit agencies are frequently more comprehensive and tailored for assess and monitor the creditworthiness of person clients. In comparison, credit registries are frequently aimed at collecting system-wide information for macroprudential along with other policy purposes.

When compared with credit registries, credit agencies really are a quite recent institution. Although credit agencies have existed in Germany, Norway, and also the U . s . States for pretty much a hundred years, they emerged in lots of other high-earnings countries, including France, Italia, and The country, as lately because the 1990s. Various countries use somewhat different names for credit agencies. For instance, credit agencies will also be known as “consumer reporting agencies” within the U . s . States and “credit reference agencies”in the Uk.

Chapter 5 from the 2013 Global Financial Development Report provides an introduction to the condition of private and public credit rating. It presents data around the possession structure and extent of knowledge collected by credit rating institutions all over the world.

The Planet Bank Group has supported the introduction of credit rating systems all over the world for over a decade. The Worldwide Finance Corporation’s Credit Agency Understanding Guide (IFC 2006) provides an introduction to encounters in developing the abilities of non-public credit rating institutions through public private partnerships and institutional innovation. The Planet Bank’s General Concepts for Credit Rating (2011) reviews guidelines and makes policy strategies for developing credit rating systems.

Why credit agencies matter?

Transparent credit details are a prerequisite for seem risk management and financial stability. Credit rating institutions, for example credit agencies, support financial stability and credit market efficiency and stability in 2 important ways. First, banks and nonbank banking institutions (NBFIs) use credit rating systems to screen borrowers and monitor the danger profile of existing loan portfolios. Second, regulators depend on credit information to know the interconnected credit risks faced by systemically important borrowers and banking institutions and also to conduct essential oversight functions. Such efforts reduce default risk and enhance the efficiency of monetary intermediation. Inside a competitive credit market, these efforts ultimately benefit consumers through lower rates of interest.

Effective credit rating systems can mitigate numerous market failures which are common in markets all over the world, and many seriously apparent in less developed economies. The supply of high-quality credit information, for instance, reduces problems of adverse selection and uneven information between borrowers and lenders. This reduces default risk and increases the allocation of recent credit. Information discussing may also promote an accountable “credit culture” by discouraging excessive debt and rewarding responsible borrowing and repayment.

Possibly most significant, credit rating enables borrowers to construct a credit rating and also to make use of this “reputational collateral” to gain access to formal credit outdoors established lending relationships. This is particularly advantageous for small establishments and new borrowers with limited use of physical collateral. Stylized evidence in the recent economic crisis also shows that positive credit information helped to guard the financial access of creditworthy borrowers that will have otherwise been stop from institutional credit.

Recommended studying:

Avery, Robert Paul Calem, and Glenn Canner. 2004. Credit History Precision and Use of Credit. Fed Bulletin, Summer time 2004. Fed, Washington, Electricity.

Worldwide Finance Corporation (IFC). 2006. Credit Agency Understanding Guide, Washington, Electricity.

Miller, Margaret. 2003. Credit Rating Systems and also the Worldwide Economy. Durch Press, Cambridge, Massachusetts.

World Bank. 2011. General Concepts for Credit Rating. World Bank, Washington, Electricity.

World Bank. 2012. Global Financial Development Report 2013: Rethinking the function from the Condition in Finance. World Bank, Washington, Electricity (


Rating Agencies