Emergence of Rating Agencies: Implications for Establishing a Regional Rating Agency in Asia

Ying Yi Tsai and Li-Gang Liu
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Ying Yi Tsai: Asian Development Bank Institute
Li-Gang Liu: Asian Development Bank Institute

No 241, ADBI Working Papers from Asian Development Bank Institute

Abstract: The present analysis sheds light on the setting up a regional rating agency in Asia in the wake of recent financial crisis. We investigate the policy facing a financial regulator while evaluating whether or not to admit new entrant into the credit rating market. In an incomplete contracting framework, we show that an impartial financial regulatory body (represented by a benevolent supranational organization) can facilitate credit ratings of high quality by allowing for the entry of new rating agencies on a non-single basis than it does for a mere single entry. This finding is caused by increased competition among the rating agencies, which induces higher quality of rating services even should rating agencies still exert below their maximum level of efforts.

Keywords: credit rating agencies; moral hazard; incomplete contracting (search for similar items in EconPapers)
JEL-codes: D43 D82 G24 L15 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2010-08-13
New Economics Papers: this item is included in nep-ifn, nep-reg and nep-sea
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