Fed finalizes revisions to rating system for large banks

The Federal Reserve today finalized revisions to its supervisory rating framework for large banks to address the “well managed” status of the institutions.

The current rating 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 Fed is amending the framework to consider a bank with no more than one deficient-1 rating to be “well managed.” Firms that do not meet this standard will be deemed not well-managed and face limitations on certain activities. A bank with a deficient-2 rating for any component will continue to be considered not well managed.

“Bank ratings should reflect overall safety and soundness, not just isolated deficiencies in a single component,” 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 American Bankers Association and Bank Policy Institute endorsed the revisions in an August letter, saying the previous rating system “often merely reflects an isolated deficiency in a single component rating based on a subjective assessment.”

The revisions will take effect 60 days after publication in the Federal Register.