Trade Associations Back Fed's LFI Rating Reforms

In a joint letter, the Bank Policy Institute ("BPI") and American Bankers Association ("ABA") supported the Federal Reserve's proposed changes to the Large Financial Institution ("LFI") rating system and welcomed the Fed's stated intention to consider more comprehensive reforms to the supervisory ratings system.

In the letter, the trade associations endorsed revising the "well managed" definition so that a bank with only one Deficient-1 component rating—which may be tied to subjective findings—can retain its "well managed" status, thereby ensuring the ratings reflect overall financial condition. The associations also backed eliminating the presumption that a D-1 rating automatically triggers an enforcement action, noting the current approach applies a lower standard than required under federal law.

The associations urged the Federal Reserve to take additional steps to revise the rating framework, including: 

1. Applying Similar Fixes to CAMELS. The associations urged the Fed to extend the LFI reforms to the CAMELS framework, which is used for subsidiary banks. Recommendations included eliminating or replacing the highly subjective management component with a more objective operational risk measure.
2. Adopting a Materiality Standard. The associations urged the Fed to tie any ratings downgrades to issues that materially affect safety and soundness, so that minor procedural or documentation issues do not result in negative ratings.
3. Basing Capital and Liquidity Ratings on Objective Metrics. The associations urged the Fed to presume satisfactory ratings when banks meet all regulatory capital and liquidity requirements, thereby reducing the influence of subjective process reviews.
4. Eliminating Double Counting of Deficiencies. The associations urged the Fed to prevent single supervisory findings from being used to downgrade multiple component ratings.
5. Revising Expansion Barriers. The associations urged the Fed to relax restrictions that prevent banks with two D-1 ratings to pursue new or expansionary activities.
6. Indexing LFI Asset Thresholds. The associations urged the Fed to adjust and periodically index the $100 billion threshold for LFI applicability to reflect economic inflation.
7. Enhancing Process and Transparency. The associations urged the Fed to provide banks the opportunity to review and rebut proposed downgrades before they are finalized.