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

18 Pages Posted: 28 Sep 2010

See all articles by Yingyi Tsai

Yingyi Tsai

National University of Kaohsiung

Li-Gang Liu

ANZ (Australia and New Zealand) Banking Group, Ltd.

Date Written: August 13, 2010

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

JEL Classification: D43, D82, G24, L15

Suggested Citation

Tsai, Yingyi and Liu, Li-Gang, Emergence of Rating Agencies: Implications for Establishing a Regional Rating Agency in Asia (August 13, 2010). ADBI Working Paper No. 241, Available at SSRN: https://ssrn.com/abstract=1671446 or http://dx.doi.org/10.2139/ssrn.1671446

Yingyi Tsai (Contact Author)

National University of Kaohsiung ( email )

Department of Applied Economics
700 Kaohsiung University Rd
Kaohsiung, 811
Taiwan
+886 7 5919189 (Phone)
+886 7 2169365 (Fax)

Li-Gang Liu

ANZ (Australia and New Zealand) Banking Group, Ltd. ( email )

Melbourne, Victoria
Australia

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