Joint Comments to the Board on the Large Financial Institution Framework

Re: Revisions to the Large Financial Institution Rating System and Framework for the Supervision of Insurance Organizations (Docket No. OP-1868)

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Ladies and Gentlemen:

The Bank Policy Institute and American Bankers Association strongly support the Federal Reserve's proposed changes to the Large Financial Institution rating system. These are necessary and common-sense changes that would rationalize the ratings process and should be adopted without delay. We also welcome the proposal's confirmation that the Federal Reserve is considering additional changes to the supervisory ratings system. We particularly urge the Federal Reserve to join the other Federal banking agencies to propose similar changes to the CAMELS rating system as an immediate next step to ensure the proposed changes to the LFI rating system have meaningful effect.

I. Introduction

The proposed targeted changes are necessary to provide more accurate ratings that correspond to firms' financial condition. Specifically, we strongly support the proposal to (1) allow banks with only one Deficient-1 (D-1) component rating and two component ratings of Conditionally Meets Expectations or better to be considered "well managed" and (2) to remove the presumption that a LFI that receives one or more D-1 component ratings will be subject to a formal or informal enforcement action.

Ratings should accurately reflect an individual bank's condition, and the collective ratings for all banks should broadly reflect the condition of the banking system. Today, rather than reflecting a comprehensive assessment of a firm's safety and soundness, a bank's rating often merely reflects an isolated deficiency in a single component rating based on a subjective assessment. In many cases, the supervisory conclusion may be based on a hypothetical stress event or not even relate to a firm's financial or operational strength and resilience. As a result, under the current LFI rating system, two-thirds of large banks have been deemed less-than-satisfactory and not "well managed" while regulators have repeatedly said that LFIs, and the banking system as a whole, remain strong and resilient.

The issue is not merely academic. Being deemed not well managed has lasting and significant effects. Under the current framework, holding companies that are considered not well managed are limited in their ability to invest in their core businesses and to expand their product offerings to meet customer needs. This hampers innovation and, ultimately, harms competitiveness and economic growth. The proposal's economic analysis, drawing on bank-specific ratings and financial data, finds: "the loss of 'well managed' status is associated with slower growth in assets and loans," and in the year following a downgrade to not well managed firms show a notable decline in both assets and loans. Accordingly, we encourage the Federal Reserve to adopt the proposed changes without delay. Part II of this letter discusses these proposed targeted changes in more detail.

Download the joint comment letter to read the full text.

Joint Comments to the Board on the Large Financial Institution Framework

I. Introduction

In Depth

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Joint Comments to the Board on the Large Financial Institution Framework

I. Introduction

In Depth

Related Products

Our Experts

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