Federal Reserve Board Adopts New Supervisory Rating System for Large Financial Institutions

The Federal Reserve Board (FRB) recently adopted a new supervisory rating system for large financial institutions (Final LFI Rating System) which goes into effect on February 1, 2019.  The new rating system applies to bank holding companies and non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $100 billion or more, and U.S. intermediate holding companies of foreign banking organizations established under Regulation YY with total consolidated assets of $50 billion or more.

On August 17, 2017, the FRB invited public comment on a notice of proposed rulemaking to adopt a new rating system for large financial institutions (Proposed LFI Rating System).  Although the Final LFI Rating System is generally consistent with the Proposed LFI Rating System, to address concerns raised by commenters, the FRB made certain minor changes to the rating system.

Under the Final LFI Rating System, covered entities will be evaluated and assigned ratings on the following three components:

Capital Planning and Positions

• This component rating evaluates (i) the effectiveness of a financial institution’s governance and planning processes used to determine the amount of capital necessary to cover risks and exposures, and to support activities through a range of conditions; and (ii) the sufficiency of a financial institution’s capital positions to comply with applicable regulatory requirements and to support the financial institution’s ability to continue to serve as a financial intermediary through a range of conditions.

Liquidity Risk Management and Positions

• This component rating evaluates (i) the effectiveness of a financial institution’s governance and risk management processes used to determine the amount of liquidity necessary to cover risks and exposures, and to support activities through a range of conditions; and (ii) the sufficiency of a financial institution’s liquidity positions to comply with applicable regulatory requirements and to support the financial institution’s ongoing obligations through a range of conditions.

Governance and Controls

• This component rating evaluates the effectiveness of a financial institution’s (i) board of directors; (ii) management of business lines and independent risk management and controls; and (iii) recovery planning (only for financial institutions subject to the FRB Large Institution Supervision Coordinating Committee’s supervisory framework).

Similar to the Proposed LFI Rating System, the Final LFI Rating System uses a four-category, non-numerical scale, to rate each of the above noted components.  However, to address concerns raised by commenters and improve the descriptiveness of the rating categories, the Final LFI Rating System uses different terminology.  Specifically, under the Final LFI Rating System, the rating categories are: (1) Broadly Meets Expectations; (2) Conditionally Meets Expectations; (3) Deficient-1; and (4) Deficient-2.  The Final LFI Rating System also clarifies the definitions within each category to provide additional guidance to examiners.