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120-479: Fitch Ratings Inc. is an American credit rating agency . It is one of the three nationally recognized statistical rating organizations ( NRSRO ) designated by the U.S. Securities and Exchange Commission and is considered as being one of the " Big Three credit rating agencies ", along with Moody's and Standard & Poor's . Fitch Ratings is dual headquartered in New York and London . Hearst owns 100 percent of

240-735: A Recommendation on the Ethics of AI . Among its recommendations is that "AI systems should not be used for social scoring or mass surveillance purposes." China is a signatory of the document. Following their submission for public comment, China in December 2021 issued the National List of Basic Penalty Measures for Untrustworthiness and the National Directory of Public Credit Information . The National Directory establishes limitations on what types of credit information can be collected or used as

360-582: 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

480-450: 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

600-477: A basis for social credit penalties or rewards. It describes three categories of data: Appropriate information for consideration includes information on the execution of judicial judgments, administrative violations, among other material, and positive recognition for trustworthy behavior. Information appropriate only when the circumstances of the violation are severe include small payment arrears or public transportation fare evasion. The National Directory bans

720-430: 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

840-615: A court judgement. Social credit does not itself bring new restrictions; it focuses on increasing implementation of existing restrictions. Although the Chinese government announced in 2014 that it would implement a nationwide social credit system by 2020, as of 2023 no full-fledged system exists. Implementation of social credit is primarily focused on marketplace behavior. As of 2023, about 1% of companies and 0.3% of individuals receive social credit related penalties per year. National financial credit reporting for businesses and individuals

960-408: 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

1080-604: A database that collects the data on corporate regulation compliance from a number of government agencies. Kendra Schaefer, head of tech policy research at the Beijing-based consultancy firm Trivium China, had described the system in a report for the US government's US-China Economic and Security Review Commission, as being “roughly equivalent to the IRS, FBI, EPA, USDA, FDA, HHS, HUD, Department of Energy, Department of Education, and every courthouse, police station, and major utility company in

1200-590: A fine or to repay a loan) despite having the ability to do so. It is hosted online at the Supreme People's Court judgment defaulter blacklist portal, and the information is shared with Credit China and the National Enterprise Credit Information Publicity System. The SPC also began working with private companies. For example, Sesame Credit began deducting credit points from people who defaulted on court fines. Although there

1320-544: A formal collaboration between private firms, has not been ruled out yet. In November 2017, Sesame Credit denied that Sesame Credit data was shared with the Chinese government. In 2017, the People's Bank of China issued a jointly owned license to Baihang Credit valid for three years. Baihang Credit is co-owned by the National Internet Finance Association (36%) and the eight other companies (8% each), allowing

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1440-407: 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

1560-473: 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

1680-425: 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

1800-547: 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

1920-505: A multi-level system, in which districts decide on scorekeepers who are responsible for reporting scores to higher-ups. Some experiments also allowed citizens to appeal the scores they were attributed. In July 2019, an NDRC spokesperson stated that at a press conference that "personal credit scores can be combined with incentives for trustworthiness, but cannot be used for punishments". The Hong Kong Government stated in July 2019 that claims that

2040-563: A national credit management system. Huang contributed more than RMB 300,000 to fund the research initiative and sponsored fieldwork in the United States and Europe. In the United States, the research group studied and prepared translations of 17 American credit reporting laws, including the Fair Credit Reporting Act . In January 2000, the research group from the Chinese Academy of Social Sciences compiled their research into

2160-765: A national pilot with eight credit scoring firms in 2014. The Social Credit System is an extension to the existing legal and financial credit rating system in China. Managed by the National Development and Reform Commission (NDRC), the People's Bank of China (PBOC) and the Supreme People's Court (SPC), the system was intended to standardize the credit rating function and perform financial and social assessment for businesses, government institutions, individuals and non-government organizations. The Chinese government's stated aim

2280-463: A policing strategy first implemented in select locations from 2001 and 2002 (during the administration of Chinese Communist Party General Secretary Jiang Zemin ) in specific locations across mainland China . In 2002, the Jiang administration proposed a social credit system as part of the promotion of a "unified, open, competitive, and orderly modern market system." In its first phase, grid-style policing

2400-439: 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

2520-469: A regular "interdepartmental agreement on joint enforcement of rewards and punishments for 'trustworthy' and 'untrustworthy' conduct." Though some reports stated social credit would be powered by artificial intelligence (AI), as of 2023 penalty decisions were made by humans, not AI, and digitization remained limited. Credit systems for local government remained undeveloped and resemble incentivized loyalty programs like those run by airlines. Participation

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2640-546: 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

2760-399: 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

2880-557: A small part of companies and individuals. By publicizing these punishments and blacklists through state-media and through other agencies, the system is aimed to create a deterrence effect. Social credit is an example of China's "top-level design" ( 顶 层 设计 ) approach. It is coordinated by the Central Comprehensively Deepening Reforms Commission . Social credit when referred by the Chinese government, generally covers two different concepts. The first

3000-530: A specific vision for what a finished system might look like. Local governments were to develop pilot initiatives which could then guide the larger policy approach. In 2003, the State Council stated that the basic framework and operational mechanisms for a social credit should be established within five years. Most of the goals in this period were missed, although the financial aspects of social credit developed much further than non-financial aspects. Among

3120-460: 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

3240-618: A text titled National Credit Management System . Among these academics was Lin Junyue, who became an important intellectual figure in the development of social credit. Premier Zhu approved the text and instructed government figures from ten ministries and commissions to begin studying the creation of a social credit management system. In late January 2000, the State Council released an essay by Zhu in which Zhu stated that China must "vigorously rectify social credit." In March 2000, Zhu delivered

3360-496: 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

3480-505: Is "traditional financial creditworthiness" where it documents the financial history of individuals and companies and score them on how well they are able to pay off future loans. The second concept is “social creditworthiness” where the government is stating that there needs to be higher "trust in society". And to build such trust, the government had proposed to combat corruption, scammers, tax evasion, counterfeiting of goods, false advertising, pollution and other problematic issues, and to create

3600-519: Is a broad policy category seeking to enforce legal obligations including laws, regulations, and contracts. Social credit does not itself bring new restrictions; it focuses on increasing implementation of existing restrictions. There are multiple social credit systems in China, some of which are designed and operated by the state, while others are operated by private companies. China's governmental approaches to social credit are described by various sets of documents issued by different institutions. There

3720-432: Is fully voluntary and there are no enticement beyond losing access to minor rewards. For fear of overreach and pushback, the Chinese central government banned punishments for low scores and minor offences. During the city trials, pilot programs only saw limited participation. Many people living in pilot program cities are unaware of the programs. In Xiamen , 210,059 users activated their social credit account, roughly 5% of

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3840-426: 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

3960-404: Is no integrated system, nor a comprehensive document setting out a unified approach. Generally, the different approaches to social credit are united by the theme of increasing digitization, data collection, and data centralization. There is no unified, numerical credit score for businesses or individuals, rather national and local platforms use different evaluation or rating systems. Due to

4080-469: Is no universal social credit score or system. The origin of the concept can be traced back to the 1980s when the Chinese government attempted to develop a personal banking and financial credit rating system, especially for rural individuals and small businesses who lacked documented records. The program first emerged in the early 2000s, inspired by the credit scoring systems in other countries. The program initiated regional trials in 2009, before launching

4200-432: Is provided by the People's Bank of China, which does not assign any numerical scoring. Red Listing practices seek to incentivize exemplary personal behavior or business compliance. Red List practices vary significantly and there are no top-level regulations or guidance addressing red lists in detail. The most common benefit to red listed companies include reduced administrative burdens or simplified procedures. Part of

4320-475: Is still deficient in trust . People often expect to be cheated or to get in trouble even if they are innocent . He believes that it is due to the Cultural Revolution , where friends and family members were deliberately pitted against each other and millions of Chinese were killed. The stated purpose of the social credit system is to help Chinese people trust each other again. One focus of social credit

4440-678: 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

4560-920: Is the third largest NRSRO rating agency, covering a more limited share of the market than S&P and Moody's, though it has grown with acquisitions and frequently positions itself as a "tie-breaker" when the other two agencies have ratings similar, but not equal, in scale. In September 2011, Fitch Group announced the sale of Algorithmics (risk analytics software) to IBM for $ 387 million. In June 2022, Fitch Group acquired GeoQuant , an AI -driven data and technology company. Fitch Ratings' long-term credit ratings are assigned on an alphabetic scale from 'AAA' to 'D', first introduced in 1924 and later adopted and licensed by S&P . Like S&P, Fitch also uses intermediate +/− modifiers for each category between AA and CCC (e.g., AA+, AA, AA−, A+, A, A−, BBB+, BBB, BBB−, etc.). Investment grade Non-investment grade Fitch's short-term ratings indicate

4680-452: Is to build judicial credibility through more effective enforcement of court orders. In 2013, the Supreme People's Court (SPC) of China started a blacklist of debtors with roughly 32,000 names. The list has since been described as a first step towards a national Social Credit System by state-owned media. The SPC's blacklist is composed of Chinese citizens and companies that refuse to comply with court orders (typically court orders to pay

4800-486: Is to enhance trust in society with the system and regulate businesses in areas such as food safety , intellectual property , and financial fraud . There is a common misconception that China operates a nationwide "social credit score" system that assigns individuals a score based on their behavior, leading to punishments if the score is too low. However, this is not true. Western media reports have sometimes exaggerated or inaccurately described this concept. According to

4920-400: The dàng'àn ( 档案 ) and hùkǒu ( 户口 ) which officials might refer to, but these systems do not provide the same degree and rapidity of feedback and consequences for Chinese citizens as the integrated electronic system because of the much greater difficulty of aggregating paper records for rapid, robust analysis. The Social Credit System also originated from grid-style social management ,

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5040-409: 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,

5160-600: The Guiding Opinions was that new blacklists should not be created on an ad hoc basis and that social credit should not be applied in policy areas without sufficient consensus. It stated that credit repair processes must be improved, that blacklists must only be used in instances of severe harm, and that information security and privacy should be prioritized. In November 2021, the United Nations Education, Scientific, and Cultural Organization (UNESCO) adopted

5280-482: 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

5400-565: The Mercator Institute for China Studies (MERICS), a Berlin-based think tank, the social credit system does not continuously monitor or evaluate individual behavior. Punishments are only for violations of laws and regulations. A quantifying score does not exist. The origin of the Social Credit System can be traced back to the early 1990s as part of attempts to develop personal banking and financial credit rating systems in China, and

5520-463: The government of China . The social credit initiative calls for the establishment of a record system so that businesses, individuals and government institutions can be tracked and evaluated for trustworthiness. There are multiple forms of the social credit system being experimented with, while the national regulatory method is based on whitelisting (termed redlisting in China) and blacklisting. There

5640-399: 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

5760-416: The Chinese government had decided that none of the pilot programs would receive authorization to be official credit reporting systems. The reasons include conflict of interest , the remaining control of the government, as well as the lack of cooperation in data sharing among the firms that participate in the development. However, the Social Credit System's operation by a seemingly external association, such as

5880-481: The Chinese market. As part of the development of the Social Credit System, the Chinese government has been monitoring the progress of third-party Chinese credit rating systems. Ultimately, Chinese government dropped the support for privately developed credit rating system, and these pilot projects remained as corporate loyalty programs . In December 2017 the National Development and Reform Commission and People's Bank of China selected "model cities" that demonstrated

6000-562: 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

6120-613: The Inter-Ministerial Joint Conference on the Establishment of the SCS was established, replacing the leading small group which had previously been the top policy organ for social credit issues. The initial blueprints of the Social Credit System were drafted in 2007 by government bodies. The social credit system also attempts to solve the moral vacuum problem, insufficient market supervision and income inequality generated by

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6240-479: 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

6360-524: The People's Bank of China licensed eight companies to begin a trial of social credit systems. Among these eight firms is Sesame Credit (owned by Alibaba Group and operated by Ant Financial ), Tencent , and China's biggest ride-sharing and online-dating services, Didi Chuxing and Baihe.com , respectively. In general, multiple firms collaborated with the government to develop the software and algorithms used to calculate credit. Commercial pilot programs developed by private Chinese conglomerates that have

6480-493: 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

6600-459: The State Council encouraged market entities to provide preferential treatment to those with outstanding financial credit records and differentiated services to those with seriously untrustworthy records. The Chinese central government originally considered having the Social Credit System be run by a private firm, but by 2017, it acknowledged the need for third-party administration. However, no licenses to private companies were granted. By mid-2017,

6720-509: The Supreme People's Court announced that a nationwide total of 7.51 million blacklisted judgment defaulters had fulfilled their legal obligations and been removed from the judgment defaulter blacklist, accounting for half of the blacklisted judgment defaulters as of that date. As a result of the COVID-19 pandemic , various aspects of social credit were modified. On February 1, 2020, the People's Bank of China announced it would temporarily suspend

6840-481: 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

6960-591: 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

7080-403: The US sharing regulatory records across a single platform”. The database can be openly accessed by any Chinese citizen on the newly created website called "Credit China". Its database also includes random information like a list of approved robot building companies, hospitals that have committed insurance fraud, universities that are deemed legitimate and a list of individuals who have defaulted on

7200-580: The United States business environment. At the time, credit management and rating were largely unfamiliar concepts within the Chinese economy. Huang sent her report to Premier Zhu Rongji , who approved it and in August 1999 ordered the People's Bank of China to take immediate action. In September 1999, the Institute of Economics of the Chinese Academy of Social Sciences began a research project on establishing

7320-484: 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

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7440-561: 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

7560-485: 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

7680-522: 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

7800-460: 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

7920-487: The authorization from the state to test out social credit experiments. The pilots are more widespread than their local government counterparts but function on a voluntary basis: citizens can decide to opt-out of these systems at any time on request. Users with good scores are offered advantages such as easier access to credit loans, discounts for car and bike sharing services, fast-tracked visa applications, free health check-ups and preferential treatment at hospitals. In 2016,

8040-748: 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

8160-468: The company following its acquisition of an additional 20 percent for $ 2.8 billion on April 12, 2018. Hearst had owned 80 percent of the company after increasing its ownership stake by 30 percent on December 12, 2014, in a transaction valued at $ 1.965 billion. Hearst's previous equity interest was 80 percent following expansions on an original acquisition of 20 percent interest in 2006. Hearst had jointly owned Fitch with FIMALAC SA, which held 20 percent of

8280-669: The company until the 2018 transaction. Fitch Ratings and Fitch Solutions are part of the Fitch Group. The firm was founded by John Knowles Fitch on December 24, 1914, in New York City as the Fitch Publishing Company. In 1989, the company was acquired by a group including Robert Van Kampen . In 1997, Fitch was acquired by FIMALAC and was merged with London-based IBCA Limited, a FIMALAC subsidiary. In 2000, Fitch acquired both Chicago-based Duff & Phelps Credit Rating Co. (April) and Thomson Financial BankWatch (December). Fitch Ratings

8400-486: 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

8520-423: The consideration of private information like religious preferences or government petitioning activity. The December 2021 National List 's purpose is to further standardize penalty measures. It specifies that administrative bodies cannot extent penalties beyond those provided in national level law and regulation. In a 2022 directive, the State Council stated that it will "actively explore innovative ways to use

8640-594: 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

8760-463: The credit concept and methods to solve difficulties, bottlenecks, and painful points that restrict the country's economic and social activities." On 14 November 2022, the NDRC issued a draft Law on the Establishment of the Social Credit System . According to academic Vincent Brussee, the draft "was deeply unsatisfactory to SCS observers worldwide. It did not stipulate anything not already regulated in one of

8880-583: 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

9000-746: The development of social credit and, in 2014, issued the Planning Outline for the Construction of a Social Credit System (2014-2020) . The Planning Outline was a major step in China's approach to developing a social credit system; before the 2014 Planning Outline , there had been only one high-level policy document (issued in 2007). Since the Planning Outline, the State Council has issued new guidance annually. The Planning Outline focused primarily on economic activity in commerce, government affairs, social integrity, and judicial credibility. It set broad goals intended to be reached by 2020: In 2015,

9120-424: The differences in various pilot programs and a fragment system structure, information regarding the scoring mechanism is often conflicting. Inspired by FICO , a numerical social credit score calculated by individual behavior and activities was given to citizens in certain pilot programs developed by financial firms or localized initiatives. However, these practices were not widespread applications and eventually,

9240-550: The enforcement side of social credit, provinces and cities promulgated regulations emphasizing heavy penalties for price hikes, violence against doctors, counterfeit medical supplies, refusal to comply with pandemic prevention measures, and wildlife trade violations. In 2020, the rights protection metrics in the NDRC's City Credit Status Monitoring and Early Warning Indicators emphasized that cities must establish transparent credit repair procedures handled within an appropriate timeframe. It also emphasized that cities should prevent

9360-399: 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

9480-477: The financial aspects of social credit which developed quickly was credit reporting. In March 2006, the People's Bank of China established the Credit Reference Center, which has information regarding financial credit worthiness and has established basic financial records for 990 million Chinese citizens as of 2019. Its records relate only to finance and does not have any blacklist mechanism. In 2007,

9600-692: 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

9720-573: 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

9840-438: 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

9960-487: The government logic for red listing companies is that it facilitates regulators' ability to focus on companies with a worse compliance record. Red Listed individuals may receive benefits like parking and public transit discounts or discount tourist site tickets. Blacklisting is based on specific instances of misconduct, not any numerical score. The Central Government operates a number of national and regional blacklists based on various types of violations. The court system

10080-536: The government's work report to the National People's Congress , in which Zhu talked about the need to rectify social credit in the context of supervision of financial institutions, fraud, tax evasion, and debt repayments. In 2002, the construction of a social credit system was formally announced during the 16th National Congress of the Chinese Communist Party . The central government had not developed

10200-500: The inclusion of mortgage and credit card payments in the credit record of people impacted by the pandemic. Private financial credit scoring companies, including Sesame Credit, suspended financial credit ratings. Various cities established mechanisms to incentivize companies to provide pandemic relief, with measures including redlisting for those donating funds and supplies with benefits like simplified administrative procedures, increased policy support, or increased financial support. On

10320-489: 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

10440-457: 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

10560-458: The many recent documents on the system. The draft just copy-pasted bits form those." As of 2022, over 62 different Social Credit System pilot programs were implemented by local governments. The pilot programs began following the release of the 2014 "Planning Outline for the Construction of a Social Credit System" by Chinese authorities. The government oversees the creation and development of these governmental pilots by requesting they each publish

10680-434: The mechanisms to keep individuals and companies accountable for such transgressions. Scholars have conceptualized four different types of systems. These four systems are not interconnected, but relatively independent from each other with their own jurisdictions, rules and logic. As of 2023, the government has only created a system that is primarily focused on assessing businesses rather than on individuals, and consists of

10800-423: The numerical score mechanism was limited to private credit rating and loyalty programs. Private involvements were ultimately abandoned by the government. The system includes sanctions for the offenders; unlike in the past where the offenders were punished by one supervising agency or court, they now face sanctions from multiple agencies, greatly increasing their effect. Though the sanctions are severe, they affect

10920-677: 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

11040-690: The other agencies, Fitch was warning the market on the constant proportion debt obligations (CPDO) with an early and pre-crisis report highlighting the dangers of CPDOs in 2007. 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

11160-617: The other cities". By 2018, some restrictions had been placed on citizens which state-owned media described as the first step toward creating a nationwide social credit system. The local government Social Credit System experiments are focused more on the construction of transparent rule-based systems, in contrast with the rating systems used in the commercial pilots. Citizens often begin with an initial score, to which points are added or deducted depending on their actions. The specific number of points for each action are often listed in publicly available catalogs. Cities also experimented with

11280-586: The over generalization of the concept of credit, stating that individual behavior such as petitioning the government, unpaid property fees, running red lights (among other listed examples) must not be included in a person's credit record. The State Council issued its Guiding Opinions on Further Improving Systems for Restraining the Untrustworthy and Building Mechanisms for Building Credit Worthiness that have Long-term Effect in November 2020. The central message of

11400-435: 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

11520-505: The population of Xiamen; 60,000 or 1.5% of population in Wuhu participated the system; Hangzhou has 1,872,316 (15%) participants and fewer regularly use the system. Scores are not shared between cities as the scoring criteria and mechanisms are different. By 2023, most private social credit initiatives had been shut down by the People's Bank of China, and regulations had cracked down on most local scoring pilot programs. Social credit in China

11640-424: 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

11760-403: The potential level of default within a 12-month period. Launched in 2008, Fitch Solutions offers a range of fixed-income products and professional development services for financial professionals. The firm also distributes Fitch Ratings' proprietary credit ratings, research, financial data, and analytical tools. The main credit rating agencies , including Fitch, were accused of misrepresenting

11880-462: 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

12000-468: 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

12120-580: The rapid economic and social changes since Chinese economic reform in 1978. As a result of these problems, trust issues emerged in Chinese society such as food safety scandals, labor law violations, intellectual property thefts and corruption. Among the purposes of social credit is promotion and moral education regarding personal integrity and honesty. The policy of the social credit system traces its origin from both policing and work management practices. The government of modern China has maintained systems of paper records on individuals and households such as

12240-565: 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

12360-445: 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

12480-402: 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

12600-496: 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

12720-542: 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

12840-412: 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

12960-482: The risks associated with mortgage-related securities, which included the collateralized debt obligation (CDO) market. There were large losses in the CDO market that occurred despite being assigned top ratings by the CRAs. For instance, losses on $ 340.7 million worth of collateralized debt obligations (CDO) issued by Credit Suisse Group added up to about $ 125 million, despite being rated AAA by Fitch. However, differently from

13080-455: 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;

13200-522: The social credit system will be rolled out in Hong Kong are "totally unfounded" and stated that the system will not be implemented there. In 2019, high-level NDRC officials stated that over 10% of people blacklisted for their commission of tax fraud had repaid their taxes, that the bad credit rate had decreased by 22.7%, and that the proportion of companies blacklisted had decreased. In the view of these officials, these were "remarkable results." In 2020,

13320-424: The state to maintain control and oversee the creation of new commercial pilot programs. As of mid-2018, only pilot schemes had been tested without any official implementation. Private companies have also signed contracts with provincial governments to set up the basic infrastructure for the Social Credit System at the provincial level. As of March 2017, 137 commercial credit reporting companies were active on

13440-412: The steps needed to make a functional and efficient implementation of the Social Credit System. Among them are: Hangzhou , Nanjing , Xiamen , Chengdu , Suzhou , Suqian , Huizhou , Wenzhou , Weihai , Weifang , Yiwu and Rongcheng . These pilots were deemed successful in their handling of "blacklists and 'redlists'", their creation of "credit sharing platforms" and their "data sharing efforts with

13560-521: 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

13680-523: 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

13800-415: 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

13920-408: Was a system for more effective communication between public security bureaus. Within a few years, the grid system was adapted for use in distributing social services. Grid management provided the authorities not only with greater situational awareness on the group level, but also enhanced the tracking and monitoring of individuals. In 2018, sociologist Zhang Lifan explained that Chinese society today

14040-604: 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

14160-451: Was high. Growth was particularly strong and profitable in the structured finance industry during the 2001-2006 subprime mortgage boom, and business with finance industry accounted for almost all of the revenue growth at at least one of the CRAs (Moody's). Social Credit System The Social Credit System ( Chinese : 社会信用体系 ; pinyin : shèhuì xìnyòng tǐxì ) is a national credit rating and blacklist being developed by

14280-417: Was inspired by Western commercial credit systems like FICO , Equifax , and TransUnion . The credit system aims to facilitate financial assessment in rural areas, where individuals and small business entities often lacked financial documents. In 1999, businesswoman Huang Wenyun wrote a report following her negative experiences with domestic business trustworthiness and her research into credit management in

14400-424: Was institutional enthusiasm for a social credit system during the 2004 to 2014 period, implementation was adversely impacted by planning difficulties stemming from the relationship between credit reporting initiatives (which were defined narrowly) and regulatory objectives (which were more vaguely defined). A lack of central coordination resulted in institutional bottlenecks. The State Council sought to accelerate

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