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

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  • Tsai, Ying Yi

    (Asian Development Bank Institute)

  • Liu, Li-Gang

    (Asian Development Bank Institute)

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    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.

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    File URL: http://www.adbi.org/files/2010.08.13.wp241.emergence.rating.agencies.asia.pdf
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    Bibliographic Info

    Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 241.

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    Length: 18 pages
    Date of creation: 13 Aug 2010
    Date of revision:
    Handle: RePEc:ris:adbiwp:0241

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    Keywords: credit rating agencies; moral hazard; incomplete contracting;

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    1. Antoine Faure-Grimaud & Eloïc Peyrache & Lucía Quesada, 2009. "The ownership of ratings," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 234-257.
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