The Federal Reserve’s proposed revisions to the large bank rating system “are necessary and common-sense changes that would rationalize the ratings process and should be adopted without delay,” the American Bankers Association and Bank Policy Institute said today in a joint letter.
The current ratings framework includes three components: capital, liquidity, and governance and controls. Each component has four potential ratings: broadly meets expectations, conditionally meets expectations, deficient-1, or deficient-2. The proposal would amend the framework by considering a bank with no more than one deficient-1 rating to be “well managed.” Firms that do not meet this standard would be deemed not well-managed and would face limitations on certain activities. A bank with a deficient-2 rating for any component would continue to be considered not well managed.
In their letter, ABA and BPI strongly supported the proposed changes, saying they are needed to improve the accuracy of the ratings system.
“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,” the associations said. “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.”
ABA and BPI also welcomed the Fed’s pledge to consider additional changes to the 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 [large financial institution] rating system have meaningful effect,” they said. In addition, the letter urged the Fed to index the thresholds going forward.
