Federal Reserve Proposes Easing Requirements for Banks’ ‘Well-Managed’ Ratings

The Federal Reserve Board proposed Thursday (July 10) that it revise its supervisory rating framework for large bank holding companies to allow those with a “Deficient-1” rating to be considered “well managed.”

Currently, a firm that receives that rating is not considered well managed, according to a Federal Register notice that details the proposal.

A banking organization that loses its “well managed” status can be limited in its ability to benefit from certain expedited processing and to undertake certain new activities, such as acquiring or investing in companies engaged in certain financial activities, without the Federal Reserve Board’s prior approval, according to the notice.

Under the proposal, banks with a “Deficient-2” rating for any component of the supervisory rating framework would still be considered not well managed, the Federal Reserve Board said in a Thursday press release.

The large bank supervisory rating framework, which was introduced in 2018, evaluates banks’ ability to maintain safe-and-sound operations and comply with laws and regulations, according to the release.

The framework includes three components: capital, liquidity, and governance and controls, per the release.

“The revisions would better align the supervisory rating framework with and more accurately reflect the strength of bank holding companies and the banking system as a whole,” the release said. “The proposal would also better align the framework with the supervisory rating systems used for other banking organizations.”

The board requested public comment on the proposal and said it will accept comments for 30 days after the proposal’s publication in the Federal Register, according to the release.

The proposal was advanced by a Monday (July 7) vote in which five board members voted yes, one voted no, and one abstained, according to the Fed’s board votes page.

Governor Michael Barr, who voted against it, said in a statement that the proposal would allow badly managed firms to be considered well managed, remove the presumption that firms will remediate their deficiencies, and be inconsistent with what the law defines as well managed.

“This proposal would undermine supervision of the largest banks by effectively allowing firms that are not well managed to be treated as though they were,” Barr said. “Firms that are not in satisfactory condition would be allowed to undertake activities that only healthy firms should undertake, which increases risk to individual banks, consumers and the financial system.”

In another recent move, the Federal Reserve voted June 25 to advance a proposal that would ease the “enhanced supplementary leverage ratio” that determines the amount of capital banks must hold against relatively low-risk assets.

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