tl;dr
The U.S. Federal Reserve is considering a rule change that would allow banks with one deficient rating to still be classified as "well managed." Currently, banks are rated on capital, liquidity, and governance/controls, and a single deficient score removes "well managed" status. This status is impor...
The U.S. Federal Reserve is considering a rule change that would allow banks with one “deficient” rating to still be classified as “well managed.” Under the current large financial institution (LFI) rating framework, banks are evaluated based on three components: capital, liquidity, and governance/controls, each with four possible ratings. If a bank receives a single deficient-1 or deficient-2 score in any component, it loses its “well managed” status.
This classification matters because banks that are “well managed” at each of their depository institutions can qualify as financial holding companies, enabling them to participate in a wider range of nonbanking activities such as securities underwriting and dealing. Michelle W. Bowman, the Fed’s vice chair for supervision, points out that nearly two-thirds of large financial holding companies do not meet the current “well managed” standard despite having capital and liquidity well above regulatory requirements.
The proposed change would require a bank to have deficiencies in both capital or liquidity ratings and governance and controls before losing the “well managed” status. This approach aims to consider the overall financial and managerial health of a firm rather than penalizing it based on a single deficiency in any one component. However, banks with a “deficient-2” score, which signals a more serious issue, would still not be regarded as “well managed.”
The Federal Reserve is currently seeking public feedback on this potential modification, signaling a willingness to adjust oversight frameworks to better reflect a bank’s holistic condition. This proposed change could have significant implications for the regulatory treatment and operational capabilities of large financial institutions.