Controversial rating framework easing ‘well-managed’ score for large BHCs finalized by Fed

Finalized changes to the supervisory rating framework for large bank holding companies were released by the Federal Reserve late Wednesday, which were proposed by a divided agency board.

The Fed said the revised rating framework “more accurately reflect the strength of individual banks and better align the finalized framework with supervisory rating systems used for other banking organizations.”

The Fed said the finalized framework is substantially similar to the framework proposed in July. That proposal eased 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, the Fed said then.

The Fed also finalized similar changes to its supervisory rating framework for insurers regulated by the agency.

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.

According to the Fed, the new, 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,” the Fed said. “Firms that are not well managed face limitations on certain activities and acquisitions.”

When the changes were proposed in July, it passed the Fed Board on 6-1 vote, with Gov. Michael Barr (and former board vice chair for supervision) Michael Barr dissenting. Barr contended then that 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.

In a statement Wednesday, current Vice Chair for Supervision Michelle Bowman said bank ratings “should reflect overall safety and soundness, not just isolated deficiencies in a single component. These framework changes address this by helping to ensure that overall firm condition is the primary consideration in a bank’s rating.”

The revised framework takes effect 60 days after publication in the Federal Register (roughly early next year).

Federal Reserve Board finalizes changes to its supervisory rating framework for large bank holding companies