In the realm of credit risk management, financial institutions often seek to assess the potential losses that could arise from default on loans or the failure of counterparties. One common approach used to estimate the likelihood of defaults is the use of credit ratings, which provide an assessment of the default risk of an issuer or a security. These ratings are assigned by rating agencies based on various financial metrics and qualitative factors.

Which of the following statements correctly describes a fundamental purpose of credit ratings in credit risk management?