Board of Governors of the Federal Reserve System

I cannot support the final rule for the large financial institution (LFI) rating system and the framework for supervising insurance organizations. This rule would undermine oversight of the largest 36 banks in the country by allowing poorly managed large banks to be treated as well managed—granting them privileges meant only for strong, healthy institutions. The changes would increase risks to individual banks, the financial system, households and businesses, and the broader economy.

As I noted in my dissent on the proposed rule in July, I have a number of concerns with the framework.¹ It reduces incentives for large banks to fix serious management problems and allows firms with significant weaknesses to expand or acquire other enterprises, raising the chance and cost of future failure. In my view, the framework also is inconsistent with the Gramm-Leach-Bliley Act (GLB Act) and subsequent requirements that "well managed" firms have a satisfactory rating for management, if given.

It is instructive to look at a specific example to illustrate the harmful effects of this rule change. Under the final rule, a large firm could have major deficiencies in capital, liquidity, or governance—and still be deemed well managed. For example, a large firm with a rating of "conditionally meets expectations" (CME) in the capital category and a "deficient-1" (D-1) rating in the category of governance and controls (G&C) would be considered "well managed" under the new rule.

By definition, a CME rating in the capital category means there are certain material financial or operational weaknesses in a firm's capital-planning practices or capital positions.² Those weaknesses may place at risk the firm's prospects for remaining safe and sound through a range of conditions if those weaknesses are not resolved in a timely manner. Additionally, by definition, the D-1 rating in the G&C category means that financial or operational deficiencies in a firm's practices or capabilities put the firm's prospects for remaining safe and sound through a range of conditions at significant risk.

Under this scenario, a firm could have significant capital weaknesses as well as serious deficiencies in risk management in a number of important areas, including cybersecurity, internal audit, anti-money laundering, and consumer compliance. That firm, or any like it, should not be considered well managed.

Further, the rule also removes the presumption that large firms with significant deficiencies (D-1 rating) must take corrective action. Eliminating that expectation would weaken supervisory authority and reduce urgency to fix critical problems.

Aside from the supervisory features, we must also consider the legal aspects of this framework. In my view, a firm with a deficient governance and controls rating cannot, under law, be considered well managed.³ The GLB Act and subsequent reforms clearly require a satisfactory rating for management, if given, for financial holding company status that allows firms to expand or acquire other businesses. In my view, the LFI framework's G&C rating is a management rating. It is therefore unlawful in my judgment to treat a firm as well managed if it fails to meet expectations in this area.

I noted these apprehensions in detail in July when the proposed rule was issued, and, given that the final rule is largely the same as the proposed rule, these concerns persist. My concerns are shared by a number of commenters on the proposed rule who noted, among other things, that the proposed LFI rating system could encourage poorly managed growth in large firms with serious problems, increasing financial stability risk and placing small banks at a disadvantage. These concerns have gone unaddressed in the final rule.

In fact, the Independent Community Bankers of America, the trade association for America's community banks, in opposing the rule changes, commented specifically that "1) The Board invites safety and soundness issues by allowing large firms with a Deficient-1 rating to be considered "well managed" and by removing the presumption that a Deficient-1 rating would result in an enforcement action 2) Lowering the bar for large banks to be considered "well managed" will accelerate consolidation and exacerbate the problem of too big to fail institutions, and 3) The Board must not deemphasize the governance and controls component for growth obsessed large firms, many of which have previously demonstrated weaknesses in these areas."

Nor does the final rule grapple with an alternative discussed in the proposed rule—moving to a composite approach. A composite approach would allow supervisors to take a holistic view of a large bank, including its management, in rating the firm. Instead, the final rule moves all the way from requiring one deficient category to requiring two deficient categories to be designated less than well managed. This ignores a more moderate and sensible option of a composite rating with lower risks to safety and soundness and financial stability.

Lastly, I am concerned about the cumulative effect of the recent trend toward rolling back regulatory and supervisory requirements for the biggest banks. The largest, most complex firms fueled the Global Financial Crisis through excessive risk-taking that nearly brought down the financial system. In the years since, strong reforms—such as higher capital, tougher liquidity requirements, and rigorous stress testing—have helped to safeguard our economy. Yet recently announced proposed rollbacks, not only in the LFI rating system, but also in large bank capital standards and in the rigor of stress testing of large banks, threaten to erode those protections.

In short, this rule change effectively redefines the term "well managed" in ways that will weaken large bank oversight, reduce large bank accountability, and result in a more vulnerable banking system. I dissent.

1. Board of Governors of the Federal Reserve System, "Statement on Large Financial Institution Rating Framework Proposal by Governor Michael S. Barr," press release, July 10, 2025. Return to text

2. Board of Governors of the Federal Reserve System, "Large Financial Institution (LFI) Rating System," SR letter 19-3 (February 26, 2019). Return to text

3. As explained in the July 10 statement by Michael S. Barr. Return to text