Credit Risk Measurement and Models: Risk Ratings

Credit risk ratings are used by all investors to measure the risk associated with a particular investment or institution. Internal credit ratings are calculated in-house using a ratings model, while external credit ratings are calculated by companies which professionally analyze investment products and financial institutions. Here we outline the key characteristics of internal and external credit ratings. We discuss external credit rating agencies and the key elements of ratings approaches used by these agencies. We also identify some of the issues surrounding the use of external credit ratings.