The Federal Reserve Board requested comment on a targeted proposal to revise its supervisory rating framework for large bank holding companies to address the “well managed” status of these firms. The revisions would better align the supervisory rating framework with and more accurately reflect the strength of bank holding companies and the banking system as a whole. The proposal would also better align the framework with the supervisory rating systems used for other banking organizations.
The Fed’s large bank supervisory rating framework, issued in 2018, evaluates whether these banks have sufficient financial and operational strength and resilience to maintain safe-and-sound operations and comply with laws and regulations through a range of conditions. The framework includes three components: capital, liquidity, and governance and controls. Each component has four potential ratings: broadly meets expectations, conditionally meets expectations, deficient-1, or deficient-2.
The proposal would amend the framework by considering a bank with no more than one “deficient-1” rating to be “well managed.” Firms that do not meet this standard would be deemed not well managed and would face limitations on certain activities. Consistent with the current framework, a bank with a deficient-2 rating for any component would continue to be considered not well managed.
“The proposal would generally require a deficiency in either a large bank holding company’s capital or liquidity ratings, in addition to a deficiency in its governance and controls, in order to be classified as not well-managed. In this way, the proposal would provide greater recognition of a firm’s overall condition in determining well-managed status. By addressing this mismatch between ratings and overall firm condition, the proposal adopts a pragmatic approach to determining whether a firm is well managed,” said Michelle Bowman, the Fed’s vice chair for Supervision, in a statement.
The Fed is also proposing to make similar changes to its supervisory rating framework for regulated insurers.