Federal Reserve Proposes New Rating System: Federal Reserve Proposes to Establish a New Rating System for the Supervision of Large Financial Institutions Designed to Align with the Supervisory Program for Those Institutions and to Enhance the Clarity and Consistency of Supervisory Assessments

Sullivan & Cromwell LLP - August 7, 2017
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On August 3, the Board of Governors of the Federal Reserve System (the FRB) issued a proposal for public comment that would establish a new rating system for the supervision of large financial institutions (LFIs). The proposed LFI rating system would apply to all bank holding companies with total consolidated assets of $50 billion or more; all non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $50 billion or more; and all U.S. intermediate holding companies of foreign banking organizations. The proposed LFI rating system would be aligned with the FRB’s existing supervisory program for LFIs and is designed to enhance the clarity and consistency of supervisory assessments and more clearly define the consequences of a given rating. The new rating system would replace the existing RFI/C(D) rating system used by the FRB for holding companies of all sizes. The proposed LFI rating system includes a new rating scale under which component ratings would be assigned for:
 

  • Capital Planning and Positions,
  • Liquidity Risk Management and Positions, and
  • Governance and Controls.

Unlike the current system, the proposed LFI rating system would not include a standalone composite rating. The FRB proposes to assign initial ratings under the new rating system during 2018.

Comments on the proposal are due 60 days after publication in the Federal Register.

The FRB concurrently issued a related proposal for public comment that would refocus the FRB’s supervisory expectations for banking organization boards of directors on their core responsibilities,  which is discussed in a separate memorandum.