Fed proposes some easing on what qualifies a bank as ‘well-managed’

A proposed rule that would ease the rating system used to determine what is a “well-managed” large financial institution (LFI), or a “well-managed” depository institution holding company significantly involved in insurance activities, was announced Thursday with a 30-day public comment period attached.

The Federal Reserve Board, voting 6-1 Monday, issued for comment a proposal that would permit firms receiving a single “deficient-1” component rating in any of the three key areas of supervision – capital, liquidity, and governance and controls – to still be considered “well managed” under Fed rules.

Fed Vice Chair for Supervision Michelle Bowman said the proposal would also “begin the process of aligning the LFI framework with the ratings systems used for other banking organizations, like the CAMELS system for depository institutions and the RFI system for smaller bank holding companies.” She said such changes could include adding a composite rating for the LFI framework and “revisiting the weighting of the management and risk management components respectively under the CAMELS and RFI frameworks in determining a holding company’s or bank’s composite rating.”

Fed Board Gov. Michael Barr dissented. Formerly vice chair for supervision, Barr said the proposal as drafted “would fundamentally change the long-established concept of well managed and would introduce greater risk to the banking system.” He said the proposal would remove the presumption that firms will take action to remediate significant deficiencies, resulting in a “deficient-1” rating. He noted in particular the implications of a deficient rating for governance and controls, stating that “is inconsistent” with the definition of well managed.

“Unless there were a composite rating that gives appropriate weight to management’s ability to manage risk as evidenced by a satisfactory rating in that category, such a firm should not be considered well managed,” he said.

Gov. Lisa Cook, in her statement, backed the notion of adding a composite rating, which she said “would produce a more holistic assessment of the organization – across individual components – and allow more nuance to distinguish well-managed from not well-managed organizations.”

Federal Reserve Board requests comment on targeted proposal to revise its supervisory rating framework for large bank holding companies to address the “well managed” status of these firms

Draft Federal Register notice

Bowman statement

Cook statement

Barr statement