Fed Proposes Governance Guidance, New Ratings for Institutions

By Chris Bruce

The Federal Reserve Board Aug. 3 asked for comment on a proposal aimed at refocusing supervisory expectations for boards of directors of Fed-supervised institutions.

The proposal, which set a 60-day comment period, said the new focus will center on core board responsibilities, such as monitoring risks and setting business plans consistent with those risks, while giving senior managers a larger role in some situations.

The Fed also asked for comment on a proposal to revamp its rating system for large financial institutions, although the new system — set to take effect next year — wouldn’t apply to insurance companies.

The first proposal, on supervisory expectations, is a three-part plan. The first part provides “board effectiveness” guidance aimed in part at clearly distinguishing between supervisory expectations for boards as opposed to senior managers. It applies to banks and thrift holding companies with assets of $50 billion or more, as well as nonbank firms tagged as risks to U.S. financial stability. Guidance for intermediate holding companies of foreign banks will come later, according to the Fed. The board effectiveness (BE) guidance would be used in connection with the new rating system separately proposed Aug. 3.

The second portion of the BE guidance would update existing supervisory guidance, while the third part said the Fed will be directing high-attention items to senior management for corrective action.

The Fed will only send those matters to boards “when the board needs to address its corporate governance responsibilities or when senior management fails to take appropriate remedial action,” the proposal said. However, boards will still be responsible for ensuring that senior managers address items raised by the Fed.

Updating Ratings

The second proposal, which asked for comment on a revised rating system, marks the Fed’s first change to its supervisory ratings since the 2007-2009 financial crisis. The Fed proposed to apply the new rating system — designated as “LFI” for “large financial institutions” — to big firms. It said the proposed LFI rating system would measure whether companies have the financial and operational toughness “to maintain safe and sound operations through a range of conditions.”

However, the Fed will still use its existing system for regional holding companies and smaller institutions. That rating system, designated RFI, has been in place since 2004, and focuses on risk management (R), financial condition (F) and the potential impact (I) of nondepository companies on the holding company. The RTI rating has been used for institutions regardless of size, and it’s still a “relevant and effective tool for developing and communicating supervisory assessments for community and regional holding companies.”

However, according to the Fed, it’s time for a change when it comes to bigger companies. “Given the systemic risks posed by LFIs and the corresponding changes to the Federal Reserve’s supervisory expectations and oversight of those firms, the Federal Reserve believes that a new rating system would be more effective than the RFI rating system for evaluating LFIs,” the proposal said.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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