Supervision and Regulation Letters

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SR 19-3 / CA 19-2:

Large Financial Institution (LFI) Rating System

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

DIVISION OF
SUPERVISION AND REGULATION

DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

SR 19-3 / CA 19-2
February 26, 2019

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK AND TO LARGE FINANCIAL INSTITUTIONS

SUBJECT:

Large Financial Institution (LFI) Rating System

Applicability:  This guidance applies to bank holding companies with total consolidated assets of $100 billion or more; all non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $100 billion or more; and U.S. intermediate holding companies of foreign banking organizations with combined U.S. assets of $50 billion or more established pursuant to the Federal Reserve’s Regulation YY.

Introduction

This letter provides an overview of the new rating system for the supervision of large financial institutions (LFIs).1 This "LFI rating system" would replace the current bank holding company rating system (referred to as the "RFI rating system") for these firms.2 See Attachment, Large Financial Institution Rating System.

The LFI rating system is designed to:  (i) align with the Federal Reserve’s current supervisory programs and practices for LFIs; (ii) enhance the clarity and consistency of supervisory assessments and communications of supervisory findings and implications; and (iii) provide greater transparency to firms regarding the supervisory consequences of a given rating. The LFI rating system supports the Federal Reserve’s supervisory program for all LFIs, including the largest firms that pose the greatest risk to U.S. financial stability.3

Applicability and Implementation

The LFI rating system is used to evaluate and communicate the supervisory condition of bank holding companies with total consolidated assets of $100 billion or more; all non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $100 billion or more;4 and U.S. intermediate holding companies of foreign banking organizations with combined U.S. assets of $50 billion or more established pursuant to the Federal Reserve’s Regulation YY.5 The Federal Reserve will assign initial LFI ratings to firms in the LISCC portfolio in early 2019. For all other firms subject to the LFI rating system, the Federal Reserve will assign initial LFI ratings in early 2020.

Federal Reserve supervision staff will continue to use the RFI rating system in assessing bank holding companies with total consolidated assets less than $100 billion.6 For noncomplex holding companies with total consolidated assets less than $3 billion, Reserve Bank supervisory staff will assign only a composite RFI rating and risk management rating to the firm following an inspection.7

Summary of LFI Rating System

The LFI rating system represents a supervisory evaluation of whether a firm possesses sufficient financial and operational strength and resilience to maintain safe-and-sound operations and comply with laws and regulations, including those related to consumer protection, through a range of conditions. The LFI rating system is composed of the following three components, which are described in greater detail in the attachment to this letter:

  1. Capital Planning and Positions
  2. Liquidity Risk Management and Positions
  3. Governance and Controls

Each LFI component is rated based on the following four-point non-numeric scale, which are described in greater detail in the attachment to this letter:

  • Broadly Meets Expectations
  • Conditionally Meets Expectations
  • Deficient-1
  • Deficient-2

A firm is considered to be in satisfactory condition if all of its component ratings are either "Broadly Meets Expectations" or "Conditionally Meets Expectations." Under the LFI rating system, a firm must be rated "Broadly Meets Expectations" or "Conditionally Meets Expectations" for each of the three components (Capital Planning and Positions, Liquidity Risk Management and Positions, and Governance and Controls) to be considered "well managed" in accordance with various statutes and regulations.8 Unlike the RFI rating system, the Federal Reserve will neither assign a standalone composite rating nor subcomponent ratings under the LFI rating system.

Communication of Ratings

In accordance with the Federal Reserve’s regulations governing confidential supervisory information, ratings assigned under the LFI rating system will be communicated by the Federal Reserve to the firm, but individual ratings are not disclosed publicly. The Federal Reserve will assign LFI ratings and communicate ratings to large firms on an annual basis and more frequently as warranted. Under the LFI rating system, the Federal Reserve will continue to rely to the fullest extent possible on the information and assessments developed by other relevant supervisors and functional regulators.

Questions

Reserve Banks should distribute this letter to LFIs in their districts, as well as to their own supervisory and examination staff. Questions regarding the LFI rating system should be directed to Richard Naylor, Associate Director, (202) 728-5854, Vaishali Sack, Assistant Director, (202) 452-5221, or Christine Graham, Manager, (202) 452-3005, Division of Supervision and Regulation, and Phyllis Harwell, Associate Director, (202) 452-3658 or Mayank Patel, Manager, (202) 452-2316, Division of Consumer and Community Affairs. In addition, questions may be sent via the Board’s public website.9

signed by
Arthur W. Lindo
Deputy Director
Division of
Supervision and Regulation

signed by
Eric S. Belsky
Director
Division of Consumer
and Community Affairs

Attachments:
Cross References:
  • SR letter 13-21, "Inspection Frequency and Scope Requirements for Bank Holding Companies and Savings and Loan Holding Companies with Total Consolidated Assets of $10 Billion or Less"
  • SR letter 12-17 / CA letter 12-14, "Consolidated Supervision Framework for Large Financial Institutions"
Notes:
  1. See 83 Fed. Reg. 58724 (November 21, 2018) and 84 Fed. Reg. 4309 (February 15, 2019) for more information.  Return to text
  2. See 69 Fed. Reg. 70444 (December 6, 2004) for more information.  Return to text
  3. The Federal Reserve’s Large Institution Supervision Coordinating Committee (LISCC) coordinates the supervisory oversight for the systemically important firms that pose the greatest risk to U.S. financial stability. Refer to the Board’s website for a list of these firms at https://www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.  Return to text
  4. SLHCs are considered to be engaged in significant commercial activities if they derive 50 percent or more of their total consolidated assets or total revenues from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1843(k)). SLHCs are considered to be engaged in significant insurance underwriting activities if they are either insurance companies or hold 25 percent or more of their total consolidated assets in subsidiaries that are insurance companies. SLHCs that meet these criteria are excluded from the definition of "covered savings and loan holding company" in section 217.2 of the Board’s Regulation Q. See 12 CFR 217.2.  Return to text
  5. Consistent with the Board’s proposal on tailoring its supervisory expectations for domestic institutions, see 83 Fed. Reg. 61408 (November 29, 2018), the Board continues to consider tailoring for foreign banking organizations.  Return to text
  6. The Federal Reserve has adopted a final rule to begin applying the RFI rating system on February 1, 2019 on a fully implemented basis to savings and loan holding companies with total consolidated assets less than $100 billion, excluding savings and loan holding companies engaged in significant insurance or commercial activities. See 83 Fed. Reg. 56081 (November 7, 2018). Non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $100 billion or more will receive supervisory ratings under the RFI rating system in 2019, and under the LFI rating system beginning in 2020. If an SLHC engaged in significant insurance or commercial activities has total consolidated assets of $100 billion or more, the Federal Reserve will continue to assign an indicative RFI rating to the firm as it considers the appropriate manner to assign supervisory ratings to such firms on a permanent basis.  Return to text
  7. See SR letter 13-21, "Inspection Frequency and Scope Requirements for Bank Holding Companies and Savings and Loan Holding Companies with Total Consolidated Assets of $10 Billion or Less."  Return to text
  8. 12 U.S.C. 1841 et. seq. and 12 U.S.C. 1461 et seq. See, for example, 12 CFR 225.4(b)(6), 225.14, 225.22(a), 225.23, 225.85, and 225.86; 12 CFR 211.9(b), 211.10(a)(14), and 211.34; and 12 CFR 223.41.  Return to text
  9. See https://www.federalreserve.gov/apps/contactus/feedback.aspx.  Return to text
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Last Update: February 28, 2019