On November 5, the Federal Reserve Board announced that it had finalized revisions to its Large Financial Institution (LFI) rating system and the Insurance Supervisory Framework that change when a firm is considered “well managed” and recalibrated the enforcement stance tied to weaker component ratings. Under the new approach, a firm with at least two component ratings of Broadly Meets Expectations or Conditionally Meets Expectations and no more than one Deficient-1 will be deemed “well managed.” The Board also replaces the automatic presumption of an enforcement action for one or more Deficient-1 ratings with a case-by-case determination, while retaining a presumption of formal action for any Deficient-2. The Insurance Supervisory Framework was updated to remove a reference to reputational risk. The changes become effective 60 days after publication in the Federal Register. Governor Michael Barr dissented, warning the rule lowers safeguards and conflicts with statutory “well managed” requirements.
The LFI Framework applies to bank holding companies and non-insurance, non‑commercial savings and loan holding companies with $100 billion or more in total consolidated assets, and to U.S. intermediate holding companies of foreign banking organizations with $50 billion or more. The Insurance Supervisory Framework applies to depository institution holding companies significantly engaged in insurance activities. Both frameworks rate three components — capital (planning/positions or capital management), liquidity (risk management/positions or liquidity management), and governance and controls — on a four-point scale: Broadly Meets Expectations, Conditionally Meets Expectations, Deficient-1, and Deficient-2.
Previously, any Deficient-1 or Deficient-2 in a component meant the firm was not “well managed,” which in turn restricted eligibility for financial holding company (FHC) status and certain expansionary activities permissible only for well‑managed firms. The final notice revises that bright line. A firm remains “well managed” with a single Deficient-1 if the other two components are at least Conditionally Meets Expectations. A firm is not well managed if it has two or more Deficient‑1s or any Deficient‑2. The Board also removes the presumption that a Deficient‑1 will trigger a formal or informal enforcement action; instead, actions “may” be taken based on the particular facts and circumstances. The presumption of a formal action for any Deficient‑2 remains. In the Insurance Supervisory Framework, the Board removes a reference to reputational risk and updates certain references.
The Board received ten comments from industry groups, public‑interest organizations, academics, members of Congress, and others. Supporters argued the changes better reflect overall strength and resilience, reduce compliance burden, and align the frameworks with other supervisory rating systems that do not make a composite determination solely on a single component. Opponents warned of safety‑and‑soundness risks, asserted the approach could enable poorly managed growth and accelerate consolidation, and questioned consistency with the Administrative Procedure Act. The Board finalized the proposal largely unchanged, noting experience since 2018 indicates a firm with one Deficient‑1 and otherwise satisfactory ratings generally has sufficient resilience, and emphasizing that Regulation W and other safeguards continue to limit subsidy transfer.
The Fed’s economic analysis shows that of 36 LFI‑rated holding companies, 17 are presently not “well managed.” The revisions would reduce that number by seven; when subsidiary bank ratings are included for FHC eligibility, only three of those seven would be newly “well managed” under the BHC Act. Among four supervised insurance organizations, one would change to “well managed” under the BHC Act. The Board expects benefits in supervisory efficiency and reduced compliance costs, while acknowledging a potential marginal increase in risk‑taking; supervisors will monitor remediation and retain full enforcement tools where warranted.
Governor Barr dissented. He argued the rule lets firms with significant weaknesses be treated as “well managed,” reduces urgency to fix Deficient‑1 issues by removing the enforcement presumption, and is inconsistent with the Gramm‑Leach‑Bliley Act’s requirement that a “well managed” firm have a satisfactory management rating (if given). In his view, the Governance & Controls component is a management rating, so a Deficient‑1 in that area should legally preclude “well managed” status.
