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FRB Solicits Comments on Proposals to Change the Rating System for Large Institutions

The Board of Governors of the Federal Reserve System ("FRB") requested public comment on two related proposals: (i) a proposal that would change the ratings system under Reg. YY for large financial institutions ("LFIs") so that it aligns with current supervisory practice; and (ii) a proposal to issue supervisory guidance for boards of directors (“boards”) under the new ratings system.

The rating system proposal introduces a new rating system for supervision of large financial institutions. It is designed to align with current supervisory practices based on the consolidated supervisory program for LFIs implemented in 2012. The ratings system currently in place, the "RFI" ratings system, is used for all FRB-supervised institutions and assigns each institution, regardless of size, a single composite rating based on financial strength. In the proposed system, the composite rating would be eliminated for LFIs in favor of three distinct component ratings in the following areas:

  • Capital Planning and Positions;

  • Liquidity Risk Management and Positions; and

  • Governance and Controls.

In each of these “core areas,” the FRB would evaluate an institution based on a multi-level scale that indicates its likelihood of failure or material distress in a range of financial conditions. The proposed new system would apply only to firms with at least $50 billion in assets. The RFI rating system would remain in place to evaluate community and regional banks.

The “Governance and Controls” section of the proposed new ratings system concerns the effectiveness of a board. The second proposal (the corporate governance proposal) would provide guidance related to an FRB evaluation of a large institution’s board of directors based on certain criteria. This includes: (i) establishing clear and consistent direction for strategy and risk tolerance, (ii) managing information flow and board discussions, (iii) holding senior management accountable, (iv) supporting independence and stature of independent risk management (including compliance) and internal audit, and (v) maintaining a capable board composition and governance structure.

The FRB evaluation would identify current supervisory expectations for a board that are not relevant to "core responsibilities" or are not in line with the FRB supervisory framework. The FRB proposal revises existing guidance to clarify board responsibilities and reshape expectations to ensure that board responsibilities are clearly distinguished from those of senior management. The FRB proposal revises expectations regarding communication of supervisory findings (e.g., Matters Requiring Immediate Attention and Matters Requiring Attention). Under the proposed process, these supervisory findings would be communicated to senior management for corrective action. The findings would be directed to the board of directors only "when the board needs to address its corporate governance responsibilities or when senior management fails to take appropriate remedial action."

Comments on the board of directors proposal must be received by October 10, 2017, and comments on the rating system proposal must be received by before October 16, 2017.

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