Fed Finalizes Revisions to Rating System for Large Financial Institutions
The Federal Reserve ("Fed") finalized amendments to its Large Financial Institution ("LFI") and Insurance Supervisory Frameworks which revises the criteria for determining whether a firm is "well managed."
In light of the revisions: (i) a firm can now be considered "well managed" if it has no more than one "Deficient-1" component rating and two components rated "Conditionally Meets Expectations" or "Broadly Meets Expectations," replacing the prior standard under which any single "Deficient-1" rating in capital, liquidity, or governance and controls automatically disqualified a firm from that status; (ii) the Fed removed the presumption that a firm with one or more "Deficient-1" ratings will automatically be subject to a formal or informal enforcement action, allowing case-specific determinations while retaining the presumption of formal enforcement for firms with any "Deficient-2" rating; and (iii) the Insurance Supervisory Framework was updated to remove a reference to "reputational risk" from its definition of model risk. (See previous coverage.)
The Fed explained that experience under the 2018 LFI Framework showed that a single "Deficient-1" rating does not necessarily indicate a firm is unsafe or unsound. The Fed determined that redefining "well managed" allows institutions with isolated deficiencies but strong overall performance to maintain that status and avoid unnecessary limits on growth or acquisitions.
The revisions will become effective 60 days after the notice is published in the Federal Register.
Governor Michael S. Barr dissented from the revisions, arguing that they weaken oversight by allowing banks with serious management deficiencies to be deemed "well managed." Mr. Barr argued that the change grants regulatory benefits to firms with material weaknesses, undermines enforcement tied to Deficient-1 ratings, and conflicts with the Gramm-Leach-Bliley Act’s requirement for satisfactory management standards. He asserted that the rule reflects a broader rollback of post-crisis safeguards, increasing systemic risk.