why sometimes there is large divergence between internal & external rating.

Question

Accepted Answer

Internal and external ratings may differ due to different methodologies, data sources, and subjective judgments.

Internal ratings are based on the bank's own assessment of creditworthiness, while external ratings are provided by independent rating agencies.
Internal ratings may be more conservative or optimistic than external ratings, depending on the bank's risk appetite and credit culture.
External ratings may be influenced by market perceptions, issuer relationships, and conflicts of interest, which may not be fully transparent or objective.
Internal and external ratings may also differ due to differences in data quality, availability, and interpretation, as well as subjective judgments about industry and macroeconomic factors.
For example, a bank may have a higher internal rating for a borrower based on its relationship, collateral, or diversification, while an external rating agency may have a lower rating based on its sector, geography, or financial ratios.

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