The use of Credit Ratings in Government Regulationsenables the government to use these ratings for different regulatory motives. Banking regulators take the help of these credit ratings in analyzing their net capital requirements. This is useful because, if the banks or financial institutions invest in low-risky securities like government bonds, they will require a low capital reserve to protect themselves from any financial bankruptcy.
Use of Credit Ratings in Government Regulations:
Credit ratings of the government regulations are used by regulators to serve various purposes as follows:
Credit rating of government regulations allow the regulators in the banking sector to make an estimation of their net capital reserves and requirements.
With the help of credit ratings, the American bond issuers are permitted to use shortened prospectus forms to issue bonds to aged issuers, provided he/she has prior experience of bond issuance and is a credit-worthy customer.
In some countries such as the United States of America, the broker-dealers as well as different investment banks are allowed to make use of credit ratings to assess their total reserve and requirement of capitals.
Regulators of insurance utilize credit ratings for evaluating the financial strengths of the concerned insurance companies.
Significance of credit ratings in government regulations:
Credit rating in government regulations has a very important role to play with respect to the formation of capital. Realizing the significance of credit ratings, several governments seemed to be exhorted to try and start-up credit rating agency businesses on absolutely domestic levels. However, they had in hand, several regulatory reliefs or encouragements acting as supportive factors for the purpose.
To sum up, credit ratings are used in government regulations, to ascertain the credit-worthiness of government entities, and decide as to whether they are eligible for foreign investments or not.