Fed adopts large financial institution (LFI) supervisory rating system; first ratings under new system will be 2019

$100 billion threshold set for domestic holding companies

A new large financial institution (LFI) supervisory rating system, with a higher asset threshold than proposed for domestic holding companies, will begin to produce initial ratings next year, according to a notice of final rule approved Friday by the Federal Reserve Board with an effective date of Feb. 1.

The system will apply to all domestic bank holding companies and non-insurance, non-commercial savings and loan holding companies with $100 billion or more in total consolidated assets (up from the $50 billion threshold proposed in August 2017) and U.S. intermediate holding companies of foreign banking organizations with $50 billion or more in total consolidated assets (as proposed).

The Fed says its decision to increase the asset threshold to $100 billion for bank holding companies and non-insurance, non-commercial SLHCs both addresses input from commenters and is consistent with the minimum threshold for general application of enhanced prudential standards established by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA, S. 2155).

“The Board has retained the asset threshold of $50 billion for U.S. IHCs of foreign banking organizations as it continues to consider appropriate tailoring of its regulations for FBOs in light of EGRRCPA; however, the Board may adjust this asset threshold in the future if necessary,” the board said in Friday’s notice.

The LFI rating system will assign three component ratings in the areas of capital planning and positions; liquidity risk management and positions; and governance and controls. It also introduces a new rating scale. The final system retains a four-category, non-numeric rating scale, but it identifies the top two categories as “Broadly Meets Expectations” and “Conditionally Meets Expectations” to align with the definitions of those categories.

Bank holding companies with total consolidated assets of at least $50 billion but less than $100 billion will continue to be evaluated subject to the RFI rating system, the Fed said. It noted the board is currently reviewing existing supervisory guidance to determine whether it is appropriate to make revisions “to further distinguish supervisory expectations for firms with total consolidated assets of less than $100 billion.”

The proposed LFI rating system would not have applied to SLHCs that are predominantly engaged in insurance or commercial activities; the Fed said the board is still considering the “appropriate regulatory regime” for such firms. “As such, the Board will continue to rate these SLHCs on an indicative basis under the RFI rating system as it considers further the appropriate manner to assign supervisory ratings to such firms on a permanent basis,” it said.

The Federal Reserve will assign initial ratings under the new LFI rating system in 2019 for bank holding companies and U.S. intermediate holding companies subject to the Large Institution Supervision Coordinating Committee framework and in 2020 for all other large financial institutions, the agency said. The Fed Board is revising provisions in Regulations K and LL so they will remain consistent with certain features of the new rating system.

The Fed says it will continue to apply its existing rating system for bank holding companies with less than $100 billion in total consolidated assets. The existing system will also be adopted for non-insurance, non-commercial savings and loan holding companies with less than $100 billion in total consolidated assets, it said.

Federal Reserve Board finalizes new supervisory rating system for large financial institutions

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