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From Banking and Finance Law Daily, November 5, 2018

Fed issues new supervisory rating system for large financial institutions

By Colleen M. Svelnis, J.D.

The Federal Reserve Board has finalized a new supervisory rating system for large financial institutions that is intended to better align with the post-crisis supervisory program for these firms. Supervisors will use the new rating system to assign a confidential rating to the firms in the core areas most important to supporting a large firm's safety and soundness and U.S. financial stability: capital; liquidity; and the effectiveness of its governance and controls. The new rating system will apply to all domestic bank holding companies and non-insurance, non-commercial savings and loan holding companies with $100 billion or more in total consolidated assets. This is a change from the $50 billion threshold originally proposed. The new rating system will also apply to U.S. intermediate holding companies of foreign banking organizations with total consolidated assets of $50 billion or more. The supervisory rating system is effective Feb. 1, 2019.

The final rule incorporates the regulatory and supervisory changes made by the Fed since 2012, which focus on capital, liquidity, and the effectiveness of governance and controls, including firms’ compliance with laws and regulations. Supervisors will assess and assign confidential ratings in each of these categories

The current supervisory program for the largest firms sets higher standards to lower the probability of a firm’s failure or material distress and reduce risks to financial stability. The existing rating system will still apply for bank holding companies with less than $100 billion in total consolidated assets, as well as for non-insurance, non-commercial savings and loan holding companies with less than $100 billion in total consolidated assets.

The Fed received 16 comments on the proposal from supervised firms, trade associations, industry consultants, and individuals. In addition, Fed staff held several meetings on the proposal with members of the public and obtained supplementary information from certain commenters. Many commenters expressed concerns regarding specific aspects of the proposal, including the applicability and implementation of the proposed rating system and its underlying components, the lack of a standalone composite rating, the ratings scale, and the consequences of ratings assigned under the rating system.

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