US Fed Finalizes Ratings Framework Revisions

Earlier this month, the US Federal Reserve Board finalized updates to its supervisory rating framework for large bank holding companies, aligning it more closely with systems used for other banking organizations.

The revised framework, initially proposed in July, aims to reflect each bank’s overall strength and resilience more accurately. The ratings system is based upon three components: governance and controls, capital, and liquidity. Each of these components can be rated as: broadly meets expectations, conditionally meets expectations, deficient-1, or deficient-2. Previously, being rated deficient-1 in any of the three components precluded a firm from being deemed “well managed.” The revised framework allows a firm to maintain a “well-managed” designation if it is rated deficient-1 in just one of the three categories.

Consistent with the prior framework, any firm that receives a deficient-2 rating or multiple deficient-1 ratings will be deemed “not well managed.” Such firms will continue to face restrictions on certain activities and acquisitions.

“Bank ratings should reflect overall safety and soundness, not just isolated deficiencies in a single component,” said Fed Vice Chair for Supervision Michelle Bowman. “These framework changes address this by helping to ensure that overall firm condition is the primary consideration in a bank’s rating.”