What is the role of a credit rating agency in financial markets?

A credit rating agency plays a critical role in financial markets primarily by assessing the creditworthiness of borrowers. This involves evaluating the ability of entities, such as corporations or governments, to repay their debts. The agency assigns ratings based on a thorough analysis of financial data, historical performance, and market conditions. These ratings serve as benchmarks for investors, helping them gauge the risk associated with different securities or debt instruments. By providing this information, credit rating agencies contribute to market efficiency, as investors can make informed decisions regarding where to allocate their capital based on the perceived risk of default.

The other roles mentioned, such as creating investment products, investing on behalf of clients, or managing financial portfolios, fall outside the scope of what credit rating agencies do. Their focus is strictly on credit evaluation, which is essential for maintaining transparency and stability in financial markets.