Capital Markets: Taking Issue - Why Complying With Basel II May Be Smart, Why A Basel III May Be Needed, Why Asian Central Banks Are Propping Up The US And Why Deutsche Bank's Development Theory Is Flawed. Brian Caplen Explains.

Banker, The, November, 2004 by Caplen, Brian

Compliancy brings arbitrage benefits

Banks are feeling weighed down by the strain of complying with Basel II. Yet it is becoming clear that the compliant bank could be a very smart player indeed.

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....