The Federal Reserve finalized changes to its supervisory rating framework for large bank holding companies. The new framework contains notable revisions to the criteria for categorizing a bank as “well-managed.”
The finalized framework is substantially similar to the Fed’s proposal issued in July. It includes revisions intended to more accurately reflect the strength of individual banks and better align with supervisory rating systems used for other banking organizations.
“Bank ratings should reflect overall safety and soundness, not just isolated deficiencies in a single component," Fed Vice Chair for Supervision Michelle Bowman said in a statement. “These framework changes address this by helping to ensure that overall firm condition is the primary consideration in a bank's rating.”
The Fed’s supervisory rating framework for large financial institutions (LFI) – bank holding companies with at least $100 billion in total consolidated assets and intermediate holding companies of a foreign banking organization with total consolidated assets of at least $50 billion – was first issued in 2018.
The framework was created to ensure LFIs maintain sufficient financial and operational strength and resilience to continue to operate in a safe and sound manner and comply with laws and regulations during a range of adverse conditions.
Three components comprise the framework: capital, liquidity and governance and controls. Each component has four potential ratings: “broadly meets expectations,” “conditionally meets expectations,” “deficient-1” or “deficient-2.”
The finalized framework will consider a firm with no more than one deficient-1 rating to be “well managed.” Consistent with the prior framework, a firm with a deficient-2 rating for any component will continue to be considered not well managed. Firms that are not well managed face limitations on certain activities and acquisitions.
The American Bankers Association and the Bank Policy Institute strongly advocated for the change to the Fed’s criteria for classifying an institution as “well-managed” in response to the July proposal.
“The issue is not merely academic. Being deemed not well managed has lasting and significant effects. Under the current framework, holding companies that are considered not well managed are limited in their ability to invest in their core businesses and to expand their product offerings to meet customer needs,” the trade groups wrote in a letter to the Fed. “This hampers innovation and, ultimately, harms competitiveness and economic growth. The proposal’s economic analysis, drawing on bank-specific ratings and financial data, finds: ‘the loss of ‘well managed’ status is associated with slower growth in assets and loans,’ and in the year following a downgrade to not well managed firms show a notable decline in both assets and loans. Accordingly, we encourage the Federal Reserve to adopt the proposed changes without delay.”
The revisions contained in the finalized framework are scheduled to take effect 60 days after publication in the Federal Register.