Board of Governors of the Federal Reserve System

Today, the Board is issuing a proposal that would revise the large financial institution (LFI) rating framework as it applies to the "well-managed" status of a firm, to better reflect the financial strength of large bank holding companies and the banking system more broadly. This proposal is the first step in pursuing a broader goal, which is to ensure that supervisory activities, and the accompanying ratings, are aligned with a renewed supervisory focus on core, material financial risks.

Under the current LFI framework, nearly two-thirds of the large financial holding companies are not "well managed" despite having capital and liquidity levels substantially above regulatory requirements. This is because the LFI framework currently assigns a firm's "well-managed" status based on a single deficiency in any one rating component, rather than taking a complete look at the financial and managerial health of a firm. The proposal would generally require a deficiency in either a large bank holding company's capital or liquidity ratings, in addition to a deficiency in its governance and controls, in order to be classified as not well-managed. In this way, the proposal would provide greater recognition of a firm's overall condition in determining well-managed status. By addressing this mismatch between ratings and overall firm condition, the proposal adopts a pragmatic approach to determining whether a firm is well managed.

Today's proposal would also begin the process of aligning the LFI framework with the ratings systems used for other banking organizations, like the CAMELS system for depository institutions and the RFI system for smaller bank holding companies. Moving forward, I expect that the Board will continue to evaluate whether additional changes to our ratings systems are warranted. These could include adding a composite rating for the LFI framework and revisiting the weighting of the management and risk management components respectively under the CAMELS and RFI frameworks in determining a holding company's or bank's composite rating.

The proposal maintains the rigorous standards to which banking organizations are held in the supervisory process. Supervision remains a critical tool promoting safety and soundness and financial stability in the banking system. Supervisors will continue to assess firms, identifying weaknesses and areas in need of improvement or remediation. When firms fail to meet expectations, supervisors will take appropriate actions, which may include issuing supervisory directives (like matters requiring attention), downgrading a firm's component ratings, and in some cases, pursuing formal or informal enforcement actions.

It is our responsibility to ensure that supervisory ratings are current, credible, and accurately reflect material financial risks. We have observed instances where the supervisory process—and its accompanying ratings—could be improved to better reflect a firm's condition. A comprehensive evaluation of the supervisory process and implementation of appropriate reforms will be necessary to improve the rating system's efficacy. Today's proposal is an important step in promoting effective supervision and ensuring firms receive ratings that accurately reflect the organization's supervisory condition. I look forward to reviewing the comments received on the proposal.