The capital advantages of running an internal ratings model have already been noted but it doesn’t stop there. If banks have a credible and sophisticated internal ratings system, they are in a position to conduct arbitrages against the market view of credits based on the broader rating agency consensus.
Banks would obviously like to hold credits that they feel are underrated, and therefore higher yielding, than the consensus view. They would like to offload credits that they believe are riskier than the market view without the appropriate return.
Already rating agency insiders report that their structured finance departments get a steer on rating disagreements when they see large swathes of a particular kind of credit lining up for securitisation. This process can only accelerate as banks’ internal rating systems improve. And who are the consultants advising the banks on upgrading their systems? The rating agencies, of course.
