Easing Access for Major Financial Institutions to Achieve 'Effectively Managed' Label
The Federal Reserve has put forward a proposal to adjust its supervisory rating framework for large bank holding companies, aiming to loosen the criteria for the "well-managed" designation. The changes, if implemented, could offer more flexibility to banks with minor deficiencies, allowing them to engage in expansionary activities like acquisitions, even if they have a single deficiency in their ratings.
Under the current system, any bank receiving even one "Deficient-1" rating in the three supervisory components—Governance & Controls, Capital Planning and Positions, or Liquidity Risk Management and Positions—is automatically disqualified from being considered "well managed." This strict rule prevents banks with a single deficiency from engaging in growth-oriented activities, even if their other ratings are strong.
The proposed revision would allow a bank to maintain "well-managed" status despite having one "Deficient-1" rating, as long as it does not have multiple "Deficient-1" ratings or any "Deficient-2" ratings. This means that a single moderate deficiency would not automatically preclude a bank from this status, providing more flexibility and aligning regulatory focus more closely with core financial risks.
The Federal Reserve's board expects the proposal could cut the number of not "well-managed" bank holding companies by eight. However, it's important to note that banks with serious deficiencies in areas such as cybersecurity controls, anti-money laundering, anti-terrorist financing systems, or consumer compliance programs could still be rated "well-managed" under the proposed change.
The proposed framework focuses on capital, liquidity, and governance and controls, with each component having four possible ratings. The changes aim to provide greater recognition of a firm's overall condition in determining well-managed status.
The Federal Reserve's board member, Jerome Powell, supports the idea of adding a composite score or measure to the framework, while his colleague, Adriana Kugler, abstained from voting but also expressed support for this concept. However, Governor Lisa Cook and Governor Michelle Bowman's fellow board member, Randal Quarles, dissented, stating that the proposal would "fundamentally change the long-established concept of well-managed" and potentially weaken big bank supervision.
The proposal marks a significant change early in Bowman's tenure, signaling a potential for more changes focusing on material financial risks. Comments on the proposal are due 30 days after it's published in the Federal Register.
The large financial institution framework applies to domestic firms with $100 billion or more in assets and foreign banks with $50 billion or more. The Federal Reserve also plans to propose similar alterations to its supervisory rating framework for insurers regulated by the Fed.
[1] https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220608a.htm [2] https://www.federalreserve.gov/supervisionreg/srletters/SR2208.htm [3] https://www.federalreserve.gov/supervisionreg/srletters/SR2208a1.pdf [4] https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220608b.htm [5] https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220608c.htm
In the revised framework, a bank may retain its "well-managed" status despite a single "Deficient-1" rating, signifying more flexibility for such institutions in business activities related to finance. This adjustment could potentially lead to increased engagement in expansionary activities such as acquisitions, as the new rules tend to focus more on a bank's overall financial health.
Banks, under the proposed changes, could still be rated "not well-managed" if they have multiple "Deficient-1" ratings or any "Deficient-2" ratings, ensuring that the new system maintains a balance between providing flexibility and ensuring solid business practices in finance.
